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Edited Transcript of PDLI earnings conference call or presentation 3-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 PDL BioPharma Inc Earnings Call

INCLINE VILLAGE Aug 17, 2017 (Thomson StreetEvents) -- Edited Transcript of PDL BioPharma Inc earnings conference call or presentation Thursday, August 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Williams

Cook Williams Communications, Inc. - Investor Relations

* John Peter McLaughlin

PDL BioPharma, Inc. - CEO, President & Director

* Peter S. Garcia

PDL BioPharma, Inc. - VP & CFO

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Conference Call Participants

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* Laura Christianson

Cowen and Company - analyst

* Maxim Jacobs

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

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Presentation

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Operator [1]

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Good afternoon, and welcome to PDL BioPharma's Second Quarter 2017 Earning Call. Today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Jennifer Williams.

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Jennifer Williams, Cook Williams Communications, Inc. - Investor Relations [2]

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Hello, 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, and you'll see that in the Investor Relations section of the PDL website, with pld.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 Investors 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 will now turn the call over to John McLaughlin, President and CEO of PDL BioPharma.

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

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Thanks, Jennifer, and good afternoon, everyone. With us today is Peter Garcia, our Vice President and Chief Financial Officer. As always, in this call, I'll review recent events before Pete summarizes our financial performance for the quarter.

Please turn with me now to Slide #3. Increasing value for our shareholders remains our top priority at PDL, and our mission is to build this value through investments. Last summer, we completed our first significant equity transaction with specialty pharma company, Noden Pharma DAC, and we completed our second one in May of this year with LENSAR, which I'll update you on during this call. Prior to this, we built a rich portfolio of income-generating assets from which we continue to reap the benefits, especially as it relates to royalties from the Depomed asset. We are also working to optimize our 2 operating companies, Noden and LENSAR.

Turning to Slide #4. The Noden transaction has provided us with a platform upon which to build a specialty pharmaceutical company. In May, PDL purchased the remaining interest in Noden that it did not own and as a result, now owns 100% of the Noden company. As you may already know, Noden has 2 products on the market, Tekturna and Tekturna HCT as they're known in the U.S. and Rasilez and Rasilez HCT as they're known in the rest of the world, all of which are approved for the treatment of hypertension.

As you'll see on Slide #5, we have transitioned responsibilities related to Tekturna from Novartis to Noden U.S. and continue the process the transitioning responsibilities relating to the Rasilez products in the rest of the world. The second quarter marks the first full quarter in which the contracted sales force has been deployed in the U.S. Our U.S. net revenue increased 33% to $12.9 million compared to $9.7 million the previous quarter. Our strategic imperative for Noden in the U.S. is, 1, to drive growth by stopping prescription erosions and driving depth and breadth of prescribing among targets; 2, to deliver a powerful message supporting the use of Tekturna in the appropriate patient types; and 3, to enhance and optimize patient access.

While it is still early in the commercialization process, our positioning with physicians is to target the 47% of the U.S. adult hypertension patients who have uncontrolled blood pressure. This may be because their disease is not well controlled by those agents or because they cannot tolerate those agents, for example, the cough associated with an ACE. Also this quarter, Noden filed its NDA for the pediatric indication in the formulation of Tekturna, and the PDUFA fee of $2.2 million was paid. Approval is estimated to be some time in the first quarter of 2018 and will grant Tekturna an additional 6 months of marketing exclusivity in the United States.

Outside the United States, as you'll see on Slide #6, Novartis continues to distribute the products, and Noden Pharma DAC receives a profit transfer from Novartis. Novartis and Noden Pharma DAC are working to transfer the marketing authorizations from Novartis companies to Noden Pharma DAC. These transfers, specifically EU, Switzerland, Canada and Japan, have been delayed per our original plan and are now expected to take place in the fourth quarter of this year. Noden's second quarter ex U.S. revenue increased approximately 16% to $3.3 million under the profit transfer arrangement with Novartis. The profit transfer is the ex U.S. revenue and is net of cost of goods and a fee charged by Novartis. This profit transfer arrangement will terminate upon the transfer of the marketing authorizations from Novartis to Noden.

With regards to the product being sold in the rest of the world, Novartis continues deregistering their product in countries in which the product has limited sales volumes and low operating margins. Noden Pharma DAC is also working on licensing the product in China, where it is approved but has not been marketed for a number of years like most countries throughout the world. Such a transaction, if it occurs, represents an upside to our internal forecasts.

Overall, we expect to see improved profitability in Noden as a result of the shift in the geographic mix of revenue to a greater percentage being U.S.-based. In the second quarter, U.S. revenue as a percent of total product revenue increased 3% to 80%.

Please turn with me now to Slide #7 for an update on our other subsidiary, LENSAR. On May 11, LENSAR and PDL jointly announced the financial restructuring of LENSAR. We converted most of our note receivable from LENSAR into equity ownership position, and LENSAR is now a wholly-owned subsidiary of ours. Effective May 11, their financial statements are being consolidated with ours. LENSAR is a global leader in next-generation femtosecond laser technology for refractive cataract surgery and markets the LENSAR Laser System for anterior capsulotomy, lens fragmentation and corneal and arcuate incisions. With their debt reduction and support from PDL, LENSAR's balance sheet is significantly strengthened. And under PDL's new ownership, LENSAR is well positioned to support its future growth and continued leadership in the femtosecond laser-assisted refractive cataract surgery sector.

Cataract surgery is the highest-volume surgical procedure globally. The market penetration of the femtosecond lasers in cataract surgery is approximately 7% of total procedures in the U.S. or less than 2% ex U.S. And LS is expected to grow approximately 15% in procedures annually through 2021. LENSAR's proprietary Laser System leads the market in innovation with Streamline III. Existing treatments provide suboptimal solution for astigmatism, which affects 60% to 70% of the patients with preexisting condition and 100% of cataract surgery patients. LENSAR has captured approximately 10% of the global procedures to date. LENSAR has 64 employees, primarily located in its headquarters in Orlando, Florida. As we did as a financial partner and now as an equity owner, we will continue to work closely with the team led by Nick Curtis, who's their CEO, to position LENSAR and its promising technologies for success.

Please turn with me now to Slide 8 for an overview of our portfolio of income-generating assets. The 6 concluded deals that we have measured in our portfolio, now including ARIAD, have yielded an averaged, annualized internal rate of return of 18.2% pretax. We should note in this calculation we do not yet consider DFM to be a concluded deal because we're still in the process of monetizing the remaining assets of that company. As far as updates on our litigation related to Wellstat Diagnostics and its Guarantors, things have not progressed as quickly as we would have liked, and we expect more progress in the second half of 2017.

Turning to one of our other investments. We had favorable results in the second quarter regarding our Depomed asset. We received cash payments of $34.6 million from the royalty rights we acquired from Depomed primarily related to Glumetza, a product which is marketed by Valeant Pharmaceuticals, and an authorized generic version of Glumetza launched by a Valeant subsidiary in February 2017 and for which PDL receives 50% of the gross margin, the same terms as the branded Glumetza. Since our inception through the second quarter of 2017, the cash return on our investment in Depomed asset is approximately $253.1 million and has exceeded our initial investment of $240.5 million in a little more than 3.5 years. I would note that the obligation to pay the profit split on Glumetza and the authorized generic version continues so long as the products are being commercialized.

Looking forward to our third quarter. In July and for the 1st month of the period, we received a royalty payment in the amount of $6.6 million for royalties earned on Glumetza sales for the month of June. This payment will be recorded as part of PDL's third quarter of 2017 financials.

Before I turn the call over to Pete to discuss our financials in more detail, I want to highlight the fact, which you'll see on Slide 9, that we have worked hard to build value for our shareholders. Our book value has dramatically increased in recent years. As of June 30, our book value was $5.24 per share.

As you'll see on Slide 10, we are now working just as hard to communicate that underlying value to Wall Street. This effort has taken many forms, including a new corporate website. We believe that this new website will be useful and relevant for all audiences seeking to learn more about PDL's strategy and the value of its current investments. You could find the website at www.pdl.com.

At this point, I'll turn the call over to Pete to discuss our financials. Pete?

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [4]

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Thank you, John. Please turn with me now to our financial results on Slide #11. For the 3 months ended June 30, 2017, our net income was $60.4 million or $0.39 per share. This marks the highest revenue and most profitable quarter PDL has reported since the fourth quarter of 2015. Our net income for the quarter can be attributed to total revenues of $143.8 million, which included royalties from PDL's licensees to the Queen et al. patents of $16.3 million, which consisted of royalties earned on sales of Tysabri, net royalty payments from acquired royalty rights, a change in fair value of the royalty rights assets of $83.7 million, which consisted of the change in estimated fair value of our royalty rights assets, a majority of which is related to the Depomed asset; interest revenue from notes receivable of financings to kaleo and CareView Communications of $5.5 million; product revenues of $16.2 million from sales of Noden products; and $2.6 million for sales and leasing of the LENSAR Laser System; and license and other revenue of $19.5 million.

Total revenues increased by 583% for the 3 months ended June 30, 2017, when compared to the same period in 2016. The increase in royalties from PDL's licensees to the Queen et al. patents is due to the increased royalties on Tysabri from Biogen. The increased -- in royalty rights change in fair value was primarily due to the current-period increase in fair value of the Depomed royalty asset by $82.9 million. We received $34.6 million in net cash royalties from our royalty rights in the second quarter of 2017 compared to $14.7 million for the same period of 2016. The increase in cash royalties and increase in fair value is mainly due to the launch of the authorized generic for Glumetza in February 2017. PDL received royalties on the authorized generic equivalent under the same terms as the branded Glumetza retroactive to February 2017.

The decrease in interest revenues was primarily due to an early repayment of the Paradigm Spine note receivable investment. Product revenues were derived from the sales of Noden products, which did not begin -- which we did not begin to recognize until the third quarter of 2016; and the sale and lease of LENSAR Laser System, which we did not begin to recognize until May of 2017. License and other revenues increased by $19.2 million, primarily due to the previously announced payment for Merck as part of the Keytruda litigation settlement.

Operating expenses were $31.1 million for the 3 months ended June 30, 2017, compared to $9.9 million for the same period of 2016. The increase in operating expenses for the 3 months ended June 30, 2017, as compared to the same period in 2016 was primarily a result of the $18.9 million in expenses related to the Noden operations, including $7.4 million of noncash intangible asset amortization and a change in fair value of contingent consideration and $3.8 million in LENSAR operating activities, including cost of product revenue since the business acquisition on May 11, 2017.

For the 6-month period ended June 30, 2017, our net income was $67.7 million or $0.42 per share. Total revenues were $189.3 million, an increase of 52% when compared to the same period in 2016. With regard to royalty rights year-to-date, PDL has received $48.1 million in net cash royalties from its royalty rights compared to $31.9 million for the same period of 2016.

Operating expenses were $58 million for the 6 months ended June 30, 2017, compared to $19.8 million for the same period of 2016. The increase in operating expenses for the 6 months was primarily a result of the $34.4 million in expenses related to the Noden operations, including $14.8 million of noncash intangible asset amortization and a change in fair value of contingent consideration, and $3.8 million in the LENSAR operating activities.

With regard to our tax rate, we have previously discussed available net operating loss carryforwards, or NOLs, from LENSAR. And while our 2017 effective tax rate is estimated to be 47%, we anticipate a cash tax rate of 15% in 2017 as a result of the available NOLs.

Turning to our condensed balance sheet results on Slide #12. PDL had cash, cash equivalents, short-term investments and other investments of $435.3 million at June 30, 2017, compared to $242.1 million at December 31, 2016. Please note that the cash balance as of June 30 does not reflect the $89 million anniversary payment obligation to Novartis from Noden as part of the acquisition of the Tekturna products. This payment was made on July 3 and will be reflected in our third quarter financials.

To update you on our share repurchase program, which we announced in March, please turn with me now to Slide #13 for an update. As you may remember, our Board of Directors authorized the repurchase of PDL common stock with up to $30 million. We began to repurchase our common stock through open market repurchases and as part of a 10b5-1 buying plan in early March of this year. And as of June 30, 2017, we completed the $30 million share repurchase program. We repurchased a total of 13.3 million shares at an average cost of $2.25 per share. At the end of the second quarter, we had approximately $154.1 million shares outstanding. We are currently evaluating the possibility of a new stock repurchase program.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Max Jacobs from Edison Group.

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

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Congrats for the great quarter. I was just wondering if you can get me a sense of how we should think about the LENSAR part of the business. I mean, are the kind of the sales that we've seen in the quarter and the expenses we've seen in the quarter, like, typical of what we should see for the rest of the year?

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

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Yes, Max, this is John. Thanks for your question. So we think that there -- they'll probably be able to grow the procedures. If you look at the run rate through '16 going into '17, it was probably a little bit flat there. But in the first quarter, they had a lot of turbulence given the fact that they were going through the reorganization, et cetera. So we do think that they can growth -- grow the business. And by that, what I mean is the number of procedures that are performed. That's the relevant measure for this, they get paid on a procedure basis.

As you're aware, they do sell a certain number of machines, but the overwhelming majority of them are placed either on a rental, and so what they get -- their source of revenue is really the use of machines. They've been doing some smart things to reorganize the company in terms of, [particularly in Europe], to take some of their machines and place them in higher-volume centers, where the use will be higher and therefore, more efficient and generate more revenue. So at this point, we're not prepared to give you specific guidance on it. But I think we are optimistic that they did a really nice job, given all the distractions in the first quarter through the second quarter of '17, and I think we'll start to see some growth thereafter.

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

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Okay, wonderful. That was very helpful. So another question I have is just what are the plans for kind of acquiring like another Tekturna to put into Noden?

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

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So that is something we're actively looking at, and those efforts are underway. We don't have anything to report today, but there are active efforts underway.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research, North America [6]

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Okay, wonderful. And just one last question. Were there any coverage changes of note for Tekturna during the quarter?

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO, President & Director [7]

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I'm not aware of any. There was a couple of minor shifts, where they moved from, like, tier 3 to tier 2, things like that within various plans. There are some efforts underway to expand coverage, which they just initiated a fairly sizable effort about a couple of weeks ago. And so we are hopeful that will produce some results in the second half of '17, but it really just started. There's nothing to report from it.

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Operator [8]

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And your next question comes from Laura Christianson from Cowen and Company.

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Laura Christianson, Cowen and Company - analyst [9]

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Mine is about Wellstat Diagnostics. I'm just curious if you have any updates on the New York Supreme Court decision.

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

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Laura, thanks for the question. We do not, at this point. As you're aware, we won. It was reversed on a procedural ground, not a substantive ground. It's now back before the court you just mentioned. We're waiting for that judge to rule on it. She has indicated she would get to it shortly, but it's been a couple of months. We hope shortly means sooner rather than later. And as I said today in our script, we're a little disappointed it hasn't moved more quickly. But this is the same judge that ruled favorably for us previously, so I -- we're feeling optimistic about it. We just wish we could get an answer out of her.

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Operator [11]

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Thank you. Ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to John McLaughlin for closing remarks.

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO, President & Director [12]

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Thank you for joining us on the call this afternoon, and please continue to stay tuned for updates on our progress in the months ahead. We look forward to presenting at the Rodman & Renshaw and Cantor Fitzgerald Health Care Conferences in September and hope to see some of you there. Thank you again, and have a good afternoon.

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Operator [13]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all have -- disconnect. Everyone, have a great day.