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Edited Transcript of PDLI earnings conference call or presentation 9-May-18 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2018 PDL BioPharma Inc Earnings Call

INCLINE VILLAGE May 12, 2018 (Thomson StreetEvents) -- Edited Transcript of PDL BioPharma Inc earnings conference call or presentation Wednesday, May 9, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominique P. Monnet

PDL BioPharma, Inc. - President

* John Peter McLaughlin

PDL BioPharma, Inc. - CEO & Director

* Peter S. Garcia

PDL BioPharma, Inc. - VP & CFO

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Conference Call Participants

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* Kenneth C. Atkins

* Maxim Jacobs

Edison Investment Research Limited - Director of Healthcare Research for North America

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Presentation

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Operator [1]

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Good afternoon, and welcome to the PDL BioPharma's Earnings Conference Call for the First Quarter 2018. Today's call is being recorded.

For opening remarks and introductions, I would now like to turn the call over to Pete Garcia, Chief Financial Officer of PDL.

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [2]

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Good afternoon, and thank you all for joining us today. I'd like to first point out that there is a slide presentation associated with today's earnings call, which you'll find in the Investor Relations section of the PDL website at pdl.com.

Before we begin, let me remind you that the information we will cover today contains forward-looking statements regarding our financial performance and other matters, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that may cause differences between current expectations and actual results are described in our filings with the Securities and Exchange Commission, copies of which may be obtained in the Investor section on our website at pdl.com.

The forward-looking statements made during this conference call should be considered 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'll now turn the call over to John McLaughlin, CEO of PDL BioPharma.

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [3]

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Thanks, Pete. And good afternoon, everyone. Joining us today is Dominique Monnet, PDL's President.

Please turn with me now to Slide #3. Our primary focus is on the creation of value for our shareholders. For over 5 years, we've been focused on building a broad portfolio of income generating assets and products to replace the revenues from our now expired Queen et al. patents. As reflected in our Q1 financials, this shift has resulted in approximately 93% of our revenue from these assets and products compared to about 69% in the same period in 2017.

We completed our first 2 equity transactions in the past 2 years, Noden and LENSAR, which we will update you on, and we continue to actively seek both products and companies to bolster our pharmaceutical portfolio. While there have not many updates since our earnings call 2 months ago, I'm pleased to report that we find ourselves in a market that is rich in acquisition candidates. So there is extensive activity going on behind the scenes. Our purchasing power and balance sheet is strong with over $400 million in cash and reduced debt, and we greatly look forward to providing updates when we can. We expect to continue to generate cash in excess of our needs to operate the business, invest in our future and maintain flexibility to take advantage of strategic opportunities that will increase long-term value in PDL.

Please turn with me now to Slide #4. As I pointed out last quarter, this slide shows a dramatic increase in our net book value over the last 4 years. We have significantly increased the value of this company in recent years through building our rich portfolio of assets and products. And we share the frustration of our shareholders. Though our book value has increased significantly, our share price has not. Our share price does not reflect the strength of our business today, but we are confident that as we continue to successfully execute on our corporate strategy, our stock price will catch up.

We believe our willingness to completely change strategic direction when the market conditions change will be of benefit to our company and shareholders in the long term. When we discussed capital allocation, our 4 main categories of capital allocation or use of cash are: one, to invest in the company's assets to grow the business, which we are doing with Noden and LENSAR; two, to make corporate acquisitions to expand the business, which we are pursuing in a diligent and disciplined manner; three, to pay down debt, which we have done both at maturity and prior to maturity at discount; and four, to purchase shares as a way to return capital to our shareholders, which is a strategy we continue to pursue.

We have adopted this multipronged approach because we want to use all of the available levers to increase shareholder value, and thus the balanced approach of adding to assets of our company in order to maintain long-term growth, while also being opportunistic about repurchasing debt or shares to also increase shareholder value. When it comes to choosing how to spend money within our existing business, we undertake an analysis of the return on capital and aim to choose products, which offer the best return.

Please turn to Slide #5. While our efforts are focused on executing our new business model, acquiring assets for long term and maximizing cash flow, we have continued to implement a share repurchase program. Combined with our previously completed $30 million share repurchase, which we completed in approximately 4 months in 2017, we are in the process of investing another $25 million towards the repurchase of shares of our common stock, which we believe will generate meaningful returns for our shareholders. To date, since March 2018, we have used $12.6 million to purchase 4.2 million shares at an average price of $3.01 per share. We will continue to consider share repurchases after this program is completed. We remain confident in our ability to drive long-term sustainable growth and to create significant value for our shareholders.

Let me now turn the call over to Dominique to provide an update on Noden Pharma.

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Dominique P. Monnet, PDL BioPharma, Inc. - President [4]

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Thank you, John. I am on Slide #6. As you know, Noden Pharma has been since mid-2016, our first biopharmaceutical operating company. Noden commercializes 2 products for the treatment of hypertension that we acquired from Novartis, Tekturna and Tekturna HCT, as they are known in the U.S., and Rasilez and Rasilez HCT, as they are known in the rest of the world.

Turning to Slide #7. In the second quarter, we reported product revenues for Tekturna and Rasilez of $18.3 million, with $10.5 million coming from U.S. sales and $7.8 million from the rest of world. This represents a 46% increase in product revenues year-over-year. Part of this increase is related to a move away from the profit transfer arrangement with Novartis ex-U. S., which was substantially completed in November 2017.

Under this profit transfer arrangement, our ex-U. S. revenues were reported net of COGS and fees from Novartis. In contrast, our results this quarter reflect both higher revenues and higher cost of sales. At the same time, you may recall that we chose to deregister Rasilez from those European countries, where the products -- where the product was either marginally or not profitable. This resulted in lower revenues, but improved operating margin. We continue to focus on balancing top line and bottom line growth. As we continue to have more history with Tekturna, we have seen steady improvement in gross to net, while their quarterly valuations of gross to net for Tekturna was 45% in Q1 of 2018 compared to 52% in Q1 2017.

With [respect] to managed care, Tekturna's coverage continues to improve. Commercial plan coverage has remained constant at 93%, while Medicare coverage improved to 69% in Q1 2018, up from 62% in 2017. In particular, CVS SilverScript that covers 4.5 million Medicare Part D patients switched Tekturna from not covered to covered and net impact that represents 13.8 million Medicare Part D patients upgraded Tekturna from nonpreferred to preferred.

In December 2017, Noden entered into an agreement with Lee's Pharmaceutical Holdings Ltd. granting them exclusive sales rights to Rasilez in China, Hong Kong, Macau and Taiwan, with guaranteed payments due to Noden. We had not forecasted sales in these territories during our acquisition of Rasilez, so this agreement represents an incremental opportunity. Noden received a $1 million license payment in Q1, which was recognized as deferred revenue.

At the end of 2017, Noden also entered into an agreement with OrphanPacific for the distribution of Rasilez in Japan. The marketing authorization has been transferred from Novartis, and OrphanPacific started shipping products into Japanese market at the end of February 2018.

And turning now to Slide #8, which shows Tekturna and Tekturna HCT total prescriptions and new prescriptions in the U.S. since January 2017. In the U.S., turning around the declining sales trend following 4 years of promotional neglect is not surprisingly a challenging task. We operate to up-sell the relative stabilization of total prescriptions and even more notably of new prescriptions for Tekturna and Tekturna HCT since the beginning of 2018.

Slide 9 shows the promotional execution of our targeted patient-type strategy. Since January of this year, our sales force has been rolling out a new campaign focused on 2 specific types of patients, who our research shows may must benefit from Tekturna, namely, the 6 million patients in the U.S. were impacted by adverse event and intolerant to ACE inhibitors and to angiotensin receptor blockers or ARBs.

Beginning this quarter, we are targeting a third type of patient, those with hypertension is not controlled on calcium channel blockers or CCBs. CCBs represent one of the top prescribed classes for hypertension with approximately 17 million patients treated in the U.S. 55% of these patients are not at goal on CCB monotherapy, and about 35% of the time, an additional agent is added. This accounts for approximately 3.3 million patients and presents a significant opportunity given Tekturna as strong clinical data demonstrating improved efficacy when added to a CCB. We're also pleased that Noden launched a sample program for (inaudible) form of Tekturna at the beginning of April. And while early, we have received positive feedback from our customers. We expect the availability of samples to support new patient starts.

Let me now hand over the call back to John. John?

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [5]

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Thanks, Dominique. Please turn with me now to Slide #10. LENSAR continues to make progress. Quarterly revenue for the first quarter of 2018 was $5 million. In addition, in Q1 2018 and for the first time in any quarter, LENSAR had positive EBITDA. On our business side, LENSAR sold 2 new systems and converted 9 systems from the recently announced acquisition of the laser business unit of Precision Eye Services.

On the development side, LENSAR has begun early work in an area that we hope to provide additional details in the future.

Please turn with me now to Slide #11, where I'll provide an update on our current royalty investments. First, the Depomed basket of royalties have to date far exceeded our expectations. From our investment made in October 2013 for $240.5 million, we have generated cash returns of $325.4 million through March 2018. In this quarter, we received $16.9 million in cash royalty payments from the Depomed royalty assets. Glumetza and its authorized generic account for the bulk of the cash returns thus far and will continue to do so in coming years. However, we expect that the other products in the portfolio, specifically Jentadueto XR, Invokamet XR and Synjardy XR, to begin to pay higher royalties than previously reported.

Other acquired royalties are ramping up more slowly, but will continue to generate revenue for many years.

Lastly, before I turn the call over to Pete, I'd like to encourage shareholders to vote on the recently distributed proxies. As you may have noticed, we've added Shlomo Yanai as an additional board member for consideration. Mr. Yanai is the current Chairman of the Board of Protalix Therapeutics and Cambrex Corp and is the former CEO of Teva Pharmaceuticals. His name and others were suggested by an investor group. And as is our stated practice, we interviewed all proposed candidates. The board determined that Mr. Yanai's global operating and leadership experience in life science and pharmaceutical industries makes him a well-qualified addition to the PDL board.

At this point, I'll turn the call over to Pete to discuss our financial results for the quarter. Pete?

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [6]

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Thank you, John. Please turn with me now to our income statement on Slide #12. For the 3 months ended March 31, 2018, our GAAP net income was $1.6 million or $0.01 per share. Total revenues were $38.5 million for the 3-month period in 2018 and included product revenues of $23.3 million, which consisted of $18.3 million from the sales of the Noden products and $5 million for the product sales of the LENSAR Laser System. Net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets were $11.1 million. Royalties from PDL's licenses to the Queen et al. patents were $2.8 million, which consisted of royalties earned on sales of Tysabri. And interest revenue from notes receivable investment to Careview Communications was $700,000.

While total revenues decreased by 15% or $6.9 million for the 3-months ended March 31, 2018, when compared to the same period in 2017, we had an 85% increase in products revenues, which was derived from the sales of the Noden product and the LENSAR Laser Systems, the latter of which PDL did not begin to recognize until May 2017. The evolution of our revenues reflects our strategic shift to a biopharmaceutical business model and the residual decline in royalty income from our expired Queen et al. patents.

Product revenues in the first quarter of 2018 accounted for approximately 61% of total revenues compared to approximately 28% in the first quarter of 2017. Ex-U. S. Noden revenue from Rasilez and Rasilez HCT revenues were $7.8 million, which was the first full quarter of revenue recognized from the ex-U. S. commercialization by Noden, having assumed commercialization from Novartis in November of 2017.

Turning to royalties. We received $18.6 million in net cash royalties from our royalty rights in the first quarter of 2018 compared to $13.5 million for the same period of 2017. The increase in cash royalties is mainly due to royalties from Glumetza sold by Valeant Pharmaceuticals, partially offset by the decrease of royalties from ARIAD as royalty ceased when the asset was sold in the first quarter of 2017.

Royalties from PDL's licensees to the Queen et al. patents were 80% or $11.4 million lower than in the first quarter of 2017, as product supply of Tysabri manufactured prior to patent expiry in the U.S. have been extinguished and ex-U. S. product supplies are rapidly being exhausted. The decrease in revenues was primarily -- in interest revenues was primarily due to the sale of the kaléo note receivable in September 2017.

Turning to operating expenses. Expenses were $34.2 million for the 3 months ended March 31, 2018, compared to $26.9 million for the same period of 2017. The increase in operating expenses was primarily a result of Noden products and LENSAR contributing additional cost of product revenue of $5.6 million and $2.4 million, respectively, as a result of increased revenue and recognition of cost of goods for ex-U. S. revenue from Noden products and revenue from LENSAR, which we did not begin to recognize until May 2017.

Sales and marketing expenses at Noden and LENSAR increased an additional $1.4 million and $1.5 million, respectively. And research and development expenses increased an additional $600,000 due to LENSAR's clinical studies. These increases were partially offset by a decrease in the fair value of contingent considerations, a decrease in research and development costs for the completion of a pediatric trial for Tekturna and decreases in general and administrative asset management expense and legal expenses related to the resolved Merck litigation.

Turning to our non-GAAP financials on Slide #13. While our GAAP net income was $1.6 million, when we adjust for the mark-to-market changes in fair value, amortization of intangible assets and other noncash items such as stock-based compensation and debt offering costs, our non-GAAP net income was $13.4 million, which compares to $13.2 million for the same period in 2017.

Turning to our condensed balance sheet results on Slide 14. We had cash, cash equivalents, short-term investments and other investments of $405.1 million at March 31, 2018, compared to $532.1 million at December 31, 2017. The change in cash balance for the quarter was primarily a result of our retiring the remaining $126.4 million of principal of our 4% convertible notes at their stated maturity by making a payment to note holders of $129 million, which included $2.6 million of accrued interest.

In addition, we used approximately $4.2 million in Q1 to repurchase PDL shares under our current share repurchase program.

Operator, at this time, we're ready to open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Max Jacobs of Edison Group.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [2]

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So first I was just wondering what was driving the lower known net revenues compared to last quarter kind of both U.S. and ex-U. S.?

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Dominique P. Monnet, PDL BioPharma, Inc. - President [3]

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Okay. The lower revenues, as you know, our revenues with Tekturna in the U.S. and ex-U. S. has been basically the follow-up from the royalty decline that we have -- was experienced in the 4 years during which Novartis actually dropped promotion. And when we acquired the asset from Novartis at the end of 2016, we were on the double-digit quarter-on-quarter. Actually in Q1 of 2017, we were at minus 12% versus the previous quarter. I think we have that decline last year by resuming promotion. And as you have seen in one of the slides that I have shown, we are confident that we are getting now to a point of where we are hiking the decline. And that was our goal in the first half of this year to basically get back to a flat -- flattening this and then to start growing again in the second half. And we are pretty much on target in delivering on that goal. Overall, I'm pleased with the quality of our sales team, and they are finding their strength. I think same thing for the marketing team. I think we're executing now on the strategy, which seems to be resonating with our customers. And finally, what also I find that they are encouraging because growth moving forward is going to be dependent on that is we're implementing or we're distributing now samples as we have been kind of waiting both samples for quite some time, and they should be very helpful in getting new patient start. So I think we are getting very much on track with what we thought we needed to get done to get the product back on track. I think with regard to international sales, I just wanted to add a brief note. On the international sales, you recall that we have in the fourth quarter deregistered in the number of markets where the product was not profitable. As we have said beforehand, our focus is really on profitability or at least we are trying to balance profitable growth and profit generation. And so clearly, by deregistering in some of these markets, we sacrificed some of the top line revenue for increased profitability.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [4]

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That's helpful. But I was just wondering also if -- were there any inventory issues or anything like that, that might have hit, particularly, in the U.S. just because the quarterly decline is kind of bigger than you would expect, even really just following just the prescriptions?

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [5]

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So I think part of it was -- Max, this is Pete. So part of it was related to the fourth quarter when we made adjustments related to the gross to net from previous quarters that relieved some of that in terms of the revenue on the U.S. side. And to answer your specific question, no, there were no additional adjustments in Q1.

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Dominique P. Monnet, PDL BioPharma, Inc. - President [6]

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Fine. Let me just kind of give you a little bit more granularity too, because indeed we are on track on what we focus most on what -- which are the prescription, and again, the new prescription, in particular. However, we had a unique -- or prescription to unique ratio, which we had anticipated based on the last 6 months of the year, which proved to be lower in this first quarter than we anticipated. When we look back at the first 6 months of last year, it actually was -- we noted that -- actually that TRx unit ratio was also lower at the time. So there is minimum there of somewhat seasonality in that ratio, which really accounted for some of the deficit. This is how on plan, which is not large, but indeed is a short deficit, which exceeds what we saw in TRx. I hope that helps.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [7]

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No, definitely helps. And just another question on Noden. Just are there any specific geographies where it's doing better than others?

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Dominique P. Monnet, PDL BioPharma, Inc. - President [8]

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Well, the only geographies where we are promoting and we made the decision again in the last quarter of last year is really the U.S. We looked at resuming direct promotion in a number of European markets and came to the conclusion that considering the product was after 4 to 5 years of promotional neglect, there was very little at this point, which would be profitable for us. The only other market internationally where we are going to be promoting and that is going to be in the future are going to be in some of the markets that we license out to Lee's Pharmaceutical Holding, namely China, in particular, but also some of the other territories that we license to them. And we do see a lot of fluctuations. We actually are ahead -- we were ahead a bit of plans in Q1 in internationally in some of these markets. But this is so much influenced by purchasing patterns that I would not draw that conclusion out of it. I think we are basically on plan in both territories at this point, considering again the deregistration in some markets.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [9]

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Great. Yes, that was definitely helpful. And just one last question. Just as the kind of discount to the book value continues to be relatively high, I was just wondering if accelerating the stock buybacks might make some sense?

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [10]

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So, Max, this is John. So that's something we're looking at. I mean, there are certain practices in terms of sort of how much you can buy back in any given day and things like that in terms of parameters as to what's a good practice in doing this. As you heard from the script, we're only probably about halfway through the amount we've got. But that's something we'll continue to look at.

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Operator [11]

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The next question is from Kenneth Atkins of Cowen.

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Kenneth C. Atkins, [12]

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Just regarding the 7C letter addressing the nomination of Shlomo to the board, could you comment a bit on your interactions with 7C, and also if you can maybe comment on some of the points brought in the letter that would be very helpful?

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [13]

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Sure. So with respect to 7Cs, you should get their perspective from them to be clear. We did -- they did put forward a slate of several candidates. We looked at -- we interviewed the candidates. As we described in the script, one of the candidates, Shlomo Yanai, we thought was very interesting and could add significant value to the board based on his experience. He is not a member of 7Cs or any other group. And so for that reason, we decided to put him forward actually as a candidate on the PDL slate, which we did and we are encouraging all shareholders to vote for him. As for the interactions with 7Cs, we've dealt with them like we would deal with any shareholder. We've had conversations with them, and we continue to look forward to have conversations with them. I think they made a number of points, so one of which is probably their most consistent theme has been in terms of buyback of shares. I would point out that we started buying back shares in 2017. The most recent effort to buy back shares we actually got approval from the board to do in September 2017. But we were precluded from implementing it because we were in a blackout period and not to get into the details of how you do these things, but you have to be in an open period, and we have not been in an open period until frankly just a short period of time ago, at which point we implemented the program as quickly as we could and implemented in a fashion that we will be able to continue to buy whether we're in a blackout period or in open period, it's just how it's structured. But to implement it, you actually have to be in an open period.

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Kenneth C. Atkins, [14]

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Okay, great. That's really helpful. One more question. I'm just wondering with regard to Tekturna sales, I'm curious are you actively reaching out to pediatricians since you had a label expansion last November? I'm just curious about how much in that untapped market that is and whether you think your efforts that would pay off in terms of sales growth?

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [15]

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So, no. To your point, there is an approval for pediatrics. It's a different dosage form. And to be clear, this is an absolutely minuscule market and the word minuscule may actually exaggerate the size of the market, to be clear. It's smaller than that. For the small number of patients that this exists for, they're going to typically be on ACEs and ARBs. They're not typically the patients that are recalcitrant to responding to those and it tends to be more transitory. So this is -- a nice benefit of this approval is, it gives us an additional 6 months of patent life on the composition of matter patent. But from a commercial or clinical perspective, it's really a pretty small effect.

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Operator [16]

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This concludes the Q&A session. I'll now turn the call back over to John McLaughlin for closing remarks.

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [17]

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Thank you for joining us on this call this afternoon, and please continue to stay tuned for updates on our progress in the months ahead. We look forward to presenting in the coming weeks at both the UBS and Jefferies Healthcare Conferences in New York City, and we hope to see some of you there. Also, as a reminder, our Annual Meeting of Stockholders is scheduled to take place here in Incline Village, Nevada, on June 8. Thank you, again, and have a good afternoon, all.

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Operator [18]

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Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day, everyone.