PDL BioPharma, Inc. (NASDAQ:PDLI) Q4 2018 Results Earnings Conference Call March 14, 2019 4:30 PM ET
Jody Cain - Investor Relations
Dominique Monnet - President and CEO
Peter Garcia - Vice President and Chief Financial Officer
Conference Call Participants
Phil Nadeau - Cohen and Company
Maxim Jacobs - Edison Group
James Lieberman - Revere Securities
Welcome to the PDL BioPharma's Quarterly Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. [Operator Instructions] As a reminder, this conference is being recorded March 14, 2019.
I would now like to turn the conference over to Jody Cain. Please go ahead ma'am.
This is Jody Cain with LHA. Thank you all for participating in today's call. Please note that a slide presentation to accompany managements prepared remarks is available on the Investor Relations section of the PDL website at pdl.com.
Joining me today from PDL BioPharma are, Dominique Monnet, President and CEO; and Pete Garcia, the Company's Chief Financial Officer.
Please turn to Slide 2 and let me remind you that during this call management will be making forward-looking statements regarding the company's financial performance and other matters and actual results may defer materially from those expressed in or implied by the forward-looking statements. Factors that may cause differences between current expectations and actual results are described in the Company’s SEC filings which are available at sec.gov and in the Investor Relations section of pdl.com.
The forward-looking statements made during this call should be considered accurate only as of the date of the live broadcast, March 14, 2019. Although the Company may elect to update forward-looking statements from time-to-time in the future, the Company specifically disclaims any duty or obligation to do so, even as new information becomes available or other events occur in the future.
I'd now turn the call over to Dominique Monnet. Dominique?
Thanks Jody. I'm pleased to be addressing everyone on my first call as CEO of PDL. I would like to take this opportunity to thank John McLaughlin, our departing CEO for his leadership of PDL for a critical 10-year period for the company. I am delighted that John will continue to serve on our board of directors. The whole PDL team wishes him all the best in his well deserved retirement which knowing John will remain very active.
Let me turn to business and with you briefly our financial highlights on Slide 3. We are reporting revenues of $45 million for the fourth quarter 2018 with product sales of $26 million. Noden products accounted for $19 million of product revenues and LENSAR Laser Systems made up the remaining $7 million. Product revenues in the fourth quarter of 2018 accounted for 58% of total revenues up from 48% of total revenues in the fourth quarter of 2017.
GAAP net income for the quarter was $16 million or $0.11 per diluted share. For the full year 2018 revenues were $198 million and included product revenue of $105 million, $81 million from Noden products and $24 million from LENSAR. GAAP net loss for 2018 was $69 million with non-GAAP net income of $57 million. We ended the year with approximately $395 million of cash on our balance sheet. Pete Garcia will provide additional details on our financial in a few minutes.
Please turn to Slide 4. During the fourth quarter, in preparation for the transition of the CEO formalities we engaged our Board of Directors to refine our strategy for shareholder value creation. Our strategy focus remains to build through acquisitions, partnerships, or licensing transaction a portfolio of carefully selected, actively managed biopharma companies. We will add value by applying our capital and expertise to nurture these assets and maximize their potential.
This strategy will allow us [ph] product revenues and ultimately cause income from operations. [Indiscernible] biopharma in these presentations refers to both prescription biologics and pharmaceutical products. We have revamped our business development [indiscernible] and we are going to target commercial stage assets with multiyear sales growth potential as well as biopharma products that are in late-stage clinical development. This opens PDL to a range of opportunities that meet our criteria of generating profitable revenue growth, delivering attractive reasonable [ph] returns on our invested capital and leveraging our expertise in the biopharma side.
Our primary goal is to build growing and profitable revenue streams from a portfolio of operating company cash flows. Under the right conditions we may capture further market value from these assets who optimally time exit strategies which could take the form of a sale or spin-off for an IPO. Our strategy does not include making further passive investments in the form of royalty or debt financing unless they are part of an M&A transaction.
We are committed to this strategy as our primary means of growing our share price and creating value or shareholders. We continue to evaluate a steady flow of potential transactions against our strict investment criteria. We remain highly disciplined in our selection of target opportunities and we are diligent [ph] in our decisions process. We have the necessary resources to succeed with this strategy.
Our high quality team at PDL has an established track record of consummating successful transactions and delivering shareholder value for re-growth, strategy planning and personal execution. This month [ph] PDL's executive team brings 20 to 35 years of biopharma experience. We have a strong liquid balance sheet that allows for the quick deployment of funds to secure transaction. We can act quickly and decisively.
Finally, we may be flexible with regard to deal structures, including acquisitions, licensing, or various forms of partnerships. In addition to our capital or experience, nimbleness, flexibility and speed are all important capability factors that have enabled us to be very critical in the transactions we have been pursuing.
Turning to Slide 5, what do we have to offer to the other party through the transaction? First, the assurance of our vision for our products and technology will be securely funded. For the development stage asset which means high quality Phase 3 program that will see both competitive label and compelling payer value propositions. For launch of commercial stage assets it means a necessary operational investment to maximize revenue potential and growth.
Second, we have extensive experience in commercializing products across a wide range of [indiscernible] in the biotech and pharma spaces in the U.S. as well as internationally. We do not have an existing commercial infrastructure and we can force feed [ph] individual products that we seek to acquisition through license awards. We see our ability to be a commercial structure specifically designed and dedicated to these products at least during the launch stages as a transactional advantage.
Finally, as much as we are seeking additional potential we could expand or growth we could accelerate, we are also looking for talent. We will prefer to build on a talented team and adding to establish a commercial organization from scratch. But we certainly know how to do the latter if required.
Now turning to an update on Noden Pharma on Slide 6, we announced in mid 2018 that Anchen Pharmaceuticals, a subsidiary of Par Pharmaceuticals, developed a generic formulation of aliskiren and we have reached a settlement with Paragraph IV for filing thereby Anchen agreed to delay the launch of its generic Tekturna until March 2019. Aliskiren is both expensive and difficult to manufacture, and we believe that Anchen's product is the sole third-party generic competitor that Tekturna will face. As far as we know, the FDA has not yet approved Anchen's ANDA, but we anticipate they will shortly.
As a result of the early generic competition, Noden's focus is no longer to grow Tekturna, but to maximize net operating income from the product's commercialization. In the U.S. it resulted in free actions. The discontinuation of Noden's U.S. sales force of 60 sales representatives last August, that resulted in expense savings of $3.5 million to $4 million per quarter. Transitioning to a program of non-personnel promotion in partnership with Archer Healthcare which has proven to be quite cost effective.
Finally, the launch last week of our authorized generic Tekturna 150 mg and 300 mg tablets in partnership with Prasco Laboratories, the industry leader in the commercialization of AGs, the launch of our AG or Tekturna was timed to secure as a benefit of being first to market. We believe it provides Noden and Prasco with a distinctive competitive advantage.
Let me note that the launch does not include an authorized generic version of Tekturna HCT. In conjunction with the resolution of our litigation with Par and Anchen, Par agreed that it would not launch its generic version of aliskiren and hydrochlorothiazide and here is the expiration of Noden's patents in 2028. Tekturna is seeking accounts for 21% of the sales of the Tekturna franchise in 2018.
I'm pleased to report that the new prescription plan for Tekturna, this graph you see on the right of that slide, has remained fairly stable since the discontinuation of our field force last August. As a result of our repositioning of Tekturna's third line option for patients who do not tolerate ACE inhibitors or ARBs physicians appear to have found a clear place for it in their step treatment of hypertension.
We expect revenues may decline slowly, but we are confident that the savings realized in sales and marketing as well as Prasco's first in market position will continue to deliver positive net cash flows from Tekturna operations. So together with Prasco we look forward to continuing to serve the needs of U.S. patients with [indiscernible] Tekturna to control their blood pressure.
Noden will continue to manufacture on commercial lines prescription aliskiren product under the Tekturna and Tekturna is the brand in the U.S. and the Rasilez and Rasilez HCT brands in international market. Ex-U.S. net income from the sales of the Rasilez products have met or exceeded our expectations in 2018 and we are looking forward to our imminent launch in China for our partners leased [indiscernible]. For the quarter, Noden was again free to call on [indiscernible] basis with net income of $10.5 million.
Turning to LENSAR on Slide 7, we are very pleased with the continued quarterly progress at LENSAR. You may recall we began reconnecting revenues from LENSAR in May 2017. For the fourth quarter of 2018 LENSAR revenues of $7.2 million increased 8% over the third quarter. LENSAR reported a GAAP net loss of $1.7 million and a positive EBITDA of $200,000 for the quarter.
As part of our investment in LENSAR, we were also able to utilize net operating losses which resulted in cash tax savings of $2.8 million in 2018. LENSAR is an exciting company led by an experienced and driven team. We have innovative technologies and exciting growth opportunities. We have helped to get it back on its feet and we may consider an exit if and when we believe that it would enable us to maximize this value for our shareholders. You may all ready know about LENSAR on its informative website lensar.com
Our strong balance sheet affords us the opportunity beyond strategic acquisitions for increasing shareholder value. Among this is the ability to paydown debt which we did in the first quarter of 2018 by retiring 126 million of principal from our 4% convertible senior notes due 2018. We also have taken advantage of our undervalued stock price to continue repurchasing shares of PDL common stock in the open market.
On Slide 8, is a review of our repurchase program. We completed two share repurchase programs between 2017 and mid 2018 for a total of $55 million at an average price of $2.49 per share.
Last September, our Board authorized a $100 million share repurchase program. We have executed this program with purchasing 8.7 million share of common stock in the open market during the fourth quarter at an average price of $2.94 per share or $25.5 million. Year-to-date as of March 13, 2019 we have deployed $35.5 million to repurchase 10.7 million shares for total repurchases of $61 million or 19.4 million shares at an average price of $3.15 per share since in future team these latest repurchase program. We view this stock repurchase program as an appropriate means of creating shareholder value given the current discrepancy between our share price and our book value.
As you can see on Slide 9, our book value stands at $5.70 per share based upon our Q4 financial results, an increase of $0.63 from last quarter as we've reduced our shares outstanding through our stock repurchase program. And while our stock prices increased nicely more than 40% since our Q3 2018 reported financials in November we still have a way to go to close the valuation gap. We have not lost sight of our strategy focused on creating long-term shareholder value with the execution of our BD and M&A strategy.
Even with the execution of the $100 million stock repurchase program we have substantial cash on hand to execute on our business strategy. We expect the cash flow generated by our current business will be in excess of our operation need, thereby providing additional cash to invest in our future.
At this point, I’ll turn the call over to Pete to give additional details on our financial results for the quarter and year. Pete?
Thank you, Dominique. Please turn to our income statement on Slide nmber10. For the three months ended December 31, 2018 our GAAP net income was $16.3 million or $0.11 per diluted share. Total revenues were $45.1 million for the period and consisted primarily of product revenues of $26 million and net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets of $19.1 million.
Our total revenues of $45.1 million for the fourth quarter of 2018 compared with $68 million for the fourth quarter of 2017. The decrease reflects lower sales of known product in the U.S. in Q4 and a decrease in the fair value of royalty rights from Assertio as in 2017 and included some one-time gains and an increase in the fair value associated with Bausch Health adding an authorized generic of Glumetza.
Additional decreases include the decline in royalties from the Queen et al. patents and no interest revenue from the CareView note in the 2018 fourth quarter. We modified the loan agreement with CareView by deferring interest payments, however, their difficult financial situation and our valuation of their business led to an impairment charge that I will detail later in my discussion of operating expenses.
Product revenues for the fourth quarter of 2018 decreased 20% to $26 million from the prior year period and consisted of $18.8 from Noden product sales and $7.2 million from LENSAR revenues. Revenue from the change in fair value of royalty rights were $19.1million four Q4 of 2018 compared with $30.1 million for the prior year period. The decrease was primarily related to higher royalties in 2017 as a result of the launch of an authorized generic for Glumetza in February 2017.
We received $20.9 million in net cast royalties for the fourth quarter of 2018. As expected, royalties from the Queen et al. patents for Tysabri were minimal in the quarter. This compares with $4.5 million in Queen et al. patent royalties in the fourth quarter of 2017. This brings a close to the Queen et al. patent royalties as we do not expect to report any meaningful Tysabri royalty revenue in 2019.
Interest revenue for the fourth quarter of 2018 was $83,000 compared with $776,000 for the fourth quarter of 2017 with the decrease due to CareView not making interest payments on their note receivable in the fourth quarter.
Turning to operating expenses for the fourth quarter of 2018, total operating expenses were $11.6 million compared with $38.2 million for the prior year period. As a result of the imminent launch of generic aliskiren and our decision to launch an authorized generic Tekturna, we were required to evaluate the known assets for impairment. Our analysis resulted in no additional impairment being recorded in Q4. However, given the extreme likelihood of a third-party generic launch in 2019, we eliminated our contingent liabilities related to future milestone payments to Novartis for Tekturna and reported a credit of expenses of $19.2 million.
Additional variances which resulted in lower expenses included lower cost of product revenue of $6.5 million and lower sales and marketing expenses of $2.8 million for the fourth quarter of 2018 compared with $6.5 million for the prior year period. With the decrease largely related to the change in commercialization strategy of the Noden products from a direct sales force model to a more cost efficient, non-personnel promotion program. Offsetting these reductions was an $8.2 million impairment loss related to the reassessed value of our note receivable from CareView Communications.
Additionally, I will point out our higher tax expense for the quarter which is a result of an $11.4 million dollar non-cash valuation allowance taken against the Noden deferred tax asset as we determined that the NOLs that are carried on Noden’s books may not be realizable in the near future.
Turning to full-year 2018 results on the same slide, total revenues were $198.1 million which compares with $320.1 million for 2017 as we continue to shift away from relying on our royalty assets for revenue. Product revenues were $105.4 million, a 25% increase from $84.1 million for 2017. Product revenues in 2018 consisted of $80.7 million from the sale of Noden products and $24.7 million from the product revenues of the LENSAR Laser System.
The change in fair value of the royalty rights assets was $85.3 million for 2018 which compares with $162.3 million for 2017 with the reduction as a result of onetime royalty payments on Glumetza in 2017 and a substantial increase in the fair value in 2017 related to additional future cash flows coming from the Glumetza authorized generic. In 2018 PDL received $78 million in net cash royalties which was on the high end of our guidance. Our Queen et al. patent royalties decreased by $31.9 million to $4.5 million as a result of our royalties for Tysabri coming to an end and interest revenue decreased by $15.4 million as a result of no interest revenue in 2018 from the Kaleo asset which was sold in late 2017.
Operating expenses for 2018 were $248.7 million compared with $126.3 million for 2017, a $122.4 million increase. The increase primarily resulted from the impairment of the Noden products intangible asset of $152.3 million we announced in Q2 of 2018, an additional cost of product revenues of Noden products of $16.6 million, and LENSAR of $1.4 million, and the $8.2 million impairment loss on our note receivable from CareView, partially offset by the reduction and elimination in the Novartis contingent liability of $41.6 million.
Our GAAP net loss for 2018 was $68.9 million or a loss of $0.47 per share. The full year net loss was primarily a result of a non-cash accounting charge related to the impairment of intangible asset from Noden due to the expected launch of a generic version of aliskiren in the U.S. offset by the decrease in the contingent liability.
Turning to our non-GAAP financial results on Slide 11, we adjusted our Q4, 2018 GAAP net income of $16.3 million for the mark-to-market changes in fair value, amortization of intangible assets, contingent considerations and other non-cash items such as stock based compensation expense and debt offering costs. This resulted in a non-GAAP net income of $15.1 million for the fourth quarter of 2018 which compares with $24.8 million for the prior year period.
We adjusted our 2018 GAAP net loss of $68.9 million with the same items as the fourth quarter plus the impairments of the intangible assets. This resulted in a non-GAAP net income for 2018 of $56.7 million which compares with non-GAAP net income for 2017 of $100.7 million.
Turning to our balance sheet on Slide 12, we had cash, cash equivalents and short term investments of $394.6 million as of December 31, 2018. This includes the positive cash flow from operations and royalties offset by $49.1 million related to our stock repurchase programs last year.
With regard to future guidance, given the recent launch of the authorized generic of Tekturna and likely competition from a third party generic, we're not in a position to give guidance on product sales for 2019. However, similarly to 2018 when we gave guidance of $70 million to $80 million in cash royalties based upon our current asset values and royalty forecasts we expect between $55 million to $65 million in cash royalties for 2019.
With that financial overview we're ready to open up the call for questions. Operator?
While we are waiting for our first question, I'd like to mention that Pete Garcia will be attending the Roth Conference being held in Dana Point, California next week. Pete will participate on the panel entitled Searching for Deep Value in Pharma on March 19, and he will be holding one on one meetings with investors during the conference. The panel will be webcast and we will post an updated corporate presentation on our website next week. Okay, operator we are ready for the first question.
Our first question is from Phil Nadeau with Cohen and Company.
Good afternoon. Thanks for taking my questions. First one on your prepared remarks you said you'd be interested in looking at products from the late development stage right through commercialization. Can you characterize late development stage a bit more, would that be Phase II, Phase III, but how early in clinical development would you be willing to go?
And that's a very good question. At this point we're going to be looking at product we should be getting close to end of Phase II preferably then maybe getting into the Phase 3 program. What we'd like is to get engaged before the Phase 3 gets fully shaped. I mean, as you know this is a critical time to share the label of the product and ultimately what we would be launching for. So from my experience being able to engage in this end of Phase II portal is pretty critical.
This being said we have a possible product which are already well into Phase 3 and when we think that the team has done a good job in shaping sales program, we would be willing to incur either later even later stage than that, so essentially the preparation of the regulatory filing and even preparation of the launch. So we would not be, we are going to get engaged before end of Phase 2, this may change in the future, but for the next couple of years, that's where we are.
Got it, okay. That's logical. And just as a follow to that. Can you remind us what the status of your clinical organization is, how many people do you have currently in clinical development in terms of…
Oh, that's a very easy answer to - question to answer. We have zero experts on the clinical side and for one good reason. I mean, it's we are exploring a number of opportunities. There are all in very different fields, and we have built a network and then we continue to expand it and then call on to its experts we could call on to whenever we evaluate a strategy. I would this is something that we may built more on the advisory side. I think again having an expert on board will may scientific side unless you really get an extraordinary person and there are quite a few out there.
It's a place where you are better off calling for the right experts and for the right assets. This of course if we were to engage in more development stage assets we may very well revisit that but then by that time we would know in which field, we tend to operate more specifically.
Got it, okay. And one last question from me, in your press release announcing the authorized generic of aliskiren, I think you suggested in there that there wasn't any visibility on the time of an actual generic launch. In your prepared remarks this afternoon, you suggested one was coming very soon. Has something changed to give you visibility over the last couple of weeks on when that generic launch or by very soon. Do you just mean, at some point in our future without, with still no visibility on and exactly when that could be?
Now you're putting your finger on a good point. We do not as 2020 visibility. Clearly we are getting intelligence and particularly from our partner Franco [ph] which is a field [ph] where people really get some pretty good information from customers and others, including suppliers. So there are two things which really are making us believe that the launch is imminent. As first we have passed this March 1st date by which Anchen could not launch. So now they could launch any time.
And although they do not have a response we know they are ANDA approved there are usually two or three days between the approval of an ANDA and the time of launch. So for all practical purposes they may actually be ready to launch as we speak. So the short answer to your question would be, we do not have very precise information that we have a number of pieces of intelligence which make us believe that, that launch is going to be soon.
So your checks in the channel suggest that there's something?
Yes and again, this is, we will see how credible or how accurate these signals are. We felt that there was converging sufficiently that we are planning now, which is why we launched our [indiscernible] generic is because we believe that their launch is going to be imminent and we wanted to make sure we would be first to market.
Perfect. That's very helpful. Thanks for taking my questions.
[Operator Instructions] Our next question is from Max Jacobs with Edison Group.
Hi guys. Thanks for taking my questions. I was wondering if you could provide any additional color on just where you are in the acquisition process for additional assets, just are you kind of at the term sheet stage and just how many, give us a sense of how many parts might be at play and whether they, are they all kind of end of Phase 2 assets or is it a mix between things that are commercial or near commercial and development stage?
Good question, Max. I think it's, first I can't speak specifically as you can imagine. Also by experience we have gone over through the last 12 months more than once in very advanced stage of negotiation only to move away because we cannot get comfortable with some diligence questions and this could always happen. We always have more than a couple of assets we look very carefully at and our engage the activity we talk about and the profile of these assets tend to be at this stage more products which are either pending registrations and preparing for launch or products which really are basically in the launch. But pretty much if we think is in that kind of stage where the product has been pretty well shape the data coming or available and we still would have an opportunity to assist with their regulatory approval, but most importantly we would be focusing very quickly on enabling the launch or just engineering the launch.
Okay, great, that's very helpful. And then just on the, are there any additional metrics that you could share on the Archer Healthcare commercializing Tekturna beyond the prescriptions?
I could give you a number of metrics, like on the number of physicians that we are calling about. We used to call on around 11,000. We are reducing this now with the launch of the authorized generic, we may reduce this even further. So we are reconsidering that effort. We have been very pleased with that collaboration and frankly we have learned quite a bit from it including myself and never really used exclusively non-personnel promotion, always used this in the past as a support to personal promotion.
And what was quite satisfying is to see that following the very nice work that the Noden reps made in getting the physicians to understand the right place for Tekturna then we could follow that and sustain that with non-personnel promotion for a period of time, so it has been a successful experience. And the other metrics we have are just essentially frankly a lot of things just kind of get a sense of execution and altruistic educating very nicely.
Okay great. And then, am I right to kind of read into your remarks that you might kind of reduce the Archer Healthcare like kind of their involvement?
This is under consideration. We basically at this point, as we mentioned, we are going to be, the Noden team is going to be managing Tekturna for profitability or profit maximization at this point. There could be a rationale for continuing to support the brand because ultimately physicians still prescribe. And even if it goes to the authorized generic the economics would still be very favorable for us. But we have not made final decisions yet on any of that. We are just looking at line by line again to maximize profit at this point and it's an exercise in process.
Okay wonderful. That was very helpful. And then I just want to know is there any update on the launch for Rasilez in China?
Yes, I was there just a couple of weeks ago with Alan Markey, the CEO of Noden and we had great discussions. I think this is imminent based on what we saw last time and I think you know on some of the launch you always had some last minute delays, but essentially that we are looking at a launch by the end of March. Now this is the latest information that we have from them. We had announced, we had planned for it in the first half. So right now they seem to be very well on track and maybe even a little earlier than we anticipated, so on the earlier end of the spectrum.
Great. And then just my last question is just on CareView, so the principal and interest payments have been delayed a couple of times, so where are the prospects for additional delays?
Pete do you want to?
Yes, hi Max. This is Pete. So we are still working through with them that issue. I would say, I would anticipate them making any interest payments in the near future for the next few quarters, but we will have to revisit that at this point in time. It’s considering impaired assets. So every quarter we will also look at it for potentially additional impairment or write down at this point.
Okay. Okay great. Thanks a lot for taking my questions.
[Operator Instructions] And your next question is from James Lieberman with Revere Securities.
Hello James. It looks like he might have dropped off operator.
And James, your line is open now.
Thank you. Okay. I guess I'm open now, can you comment on the filtration module? I don't know if you would comment much about that, it looked like it could in fact be a major groundbreaking technology?
I'm sorry, James could you repeat your question, I didn’t, we didn’t hear you well.
And I'm sorry. Thank you. And perhaps you've already covered this, but I wondered if you could comment on the filtration module. I think there was something that was mentioned in January and in January looked like it could be a major breakthrough technology, I wondered what the path to market would be for that?
No, I think just maybe we want to follow up on the separate call because I had to be very candid I'm not sure what you're referring to. So that, maybe I'm just not answering your question or not understanding your question, so please feel free to follow up with that, and we can do…?
I saw a news release on January 10, but perhaps that was inaccurate, so I will follow up. Thank you very much.
Thank you, James.
There are no further questions at this time. Mr. Dominique Monnet, please proceed with your presentation or any closing remarks.
Well, thank you very much to all who participated today once again, we look forward to updating you on our progress when PDL reports first quarter 2019 results in early May and in the meantime, thanks again. And we wish you a wonderful end of your day.
Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you disconnect your lines.