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Edited Transcript of PDLI earnings conference call or presentation 9-May-19 8:30pm GMT

Q1 2019 PDL BioPharma Inc Earnings Call

INCLINE VILLAGE May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of PDL BioPharma Inc earnings conference call or presentation Thursday, May 9, 2019 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. - CEO, President & Director

* Peter S. Garcia

PDL BioPharma, Inc. - VP & CFO

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Conference Call Participants

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* Maxim Jacobs

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

* Philip M. Nadeau

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Jody Cain

Lippert/Heilshorn & Associates, Inc. - SVP of LA

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Presentation

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Operator [1]

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Hello and welcome to the PDL BioPharma quarterly conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 9, 2019.

I would now like to turn the conference over to Jody Cain. Please go ahead.

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Jody Cain, Lippert/Heilshorn & Associates, Inc. - SVP of LA [2]

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This is Jody Cain with LHA. Thank you for participating in today's call. Please note that a slide presentation to accompany management's prepared remarks is available in 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 differ 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, May 9, 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 like to turn the call over to Dominique Monnet. Dominique?

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

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Thank you, Jody. Good afternoon, everyone, and thanks for joining us. Before we begin to review our Q1 financial and operational results, I'm pleased to start the call by highlighting our recent equity investment in Evofem Biosciences. As you have likely read, in April, we invested $30 million in the first tranche of a planned $60 million transaction, and we currently own just under 20% of the outstanding share. We are in the process of completing additional due diligence prior to exercising our rights on the second tranche, also in the amount of $30 million by June 10.

If we were to exercise our right to complete the full transaction, we expect to earn approximately 30% of Evofem's equity capital. The ownership position may increase further if we exercise warrants currently with each investment tranche. We are excited about this equity investment. It exemplifies the type of strategy transaction we seek to apply our capital and our expertise to enable talented teams and promising product to achieve greater potential, thereby creating attractive value for our shareholders.

Turning to Slide 3. And this is a brief background on Evofem. Evofem is a publicly traded company developing innovative products for women's sexual and reproductive health. It's lead investigational drug product, Amphora, is an on-demand, non-hormonal gel contraceptive. Evofem initially submitted Amphora to the U.S. FDA for approval in 2015 based on positive results from a Phase III trial. The company received a complete response letter due to disparity in efficacy results from clinical sites in Russia versus those in other geographies. Evofem proceeded to run another Phase III study called Ampower exclusively at sites in the U.S.

The results of the Ampower study reported by Evofem in December 2018 showed that Amphora made the primary endpoint of prevention of pregnancy at a favorable safety profile and was well tolerated. Evofem plans to resubmit the NDA during the fourth quarter of this year and is preparing for commercial product launch in the U.S. in the first quarter or in the first half of 2020, subject of course to FDA approval.

Turning to Slide 4. Let me share some of the reasons that led to our decision to make our initial investment in Evofem. First, we like the therapeutic space. We previously identified women's healthcare as an area of strategic interest because it presents some significant unmet medical needs that unfortunately have been underserved by large pharmaceutical companies. Evofem is pursuing a compelling vision of bringing novel solutions to advance health of women worldwide. We believe that its first asset, Amphora, is poised to deliver that vision. Secondly, we like the Evofem team. While PDL has a proven capability to establish a commercial organization from scratch, it is a hard and time-consuming thing to do. We'd much rather build on existing team that already is high quality. Evofem is led by a strong talented highly experienced management team, with a track record of successful clinical and commercial execution in the women's health space. CEO Saundra Pelletier is an accomplished pharmaceutical leader. She is a passionate advocate for women's health issues and has assembled an impressive team that has the talent, expertise and commitment to succeed. Third, we like the asset. Amphora fits well with our strategic focus of being a late-stage novel solution to an underserved medical need, with attractive near term commercial potential.

Amphora provides women with a nonhormonal on-demand contraceptive, which makes it an attractive choice for women who were reluctant to use a hormonal contraceptive. The addressable market is considerable. In the United States alone, it is estimated that 16 million women who are sexually active are not using a contraceptive method that do not want to get pregnant. This includes women who cannot, or will not, use hormonal contraception.

This is a primary population that Amphora is expected to serve. Market research shows that Amphora may also appeal to women who are currently using hormonal contraception but are concerned about the side effects of the long-term impact of hormones. These women may also welcome hormone-free on-demand method. From the U.S. payers' standpoint, we are aligned with Evofem's belief that Amphora will be widely reimbursed as a standalone contraception method with low or no co-pay to the requirements through the [U. S. Healthcare Act.]

Last, but not least, Amphora holds potential for label expansion. Evofem recently completed enrollment in a landmark Phase IIb clinical trial of Amphora for the prevention of chlamydia and gonorrhea.

Fourth, we like the structure of this transaction. It enables us to use our capital to add value. In this transaction, our capital investment is expected to be applied to fund Evofem's planned activity including finalizing development and preparing for the commercialization of Amphora. The 2-tranche structure of this deal allows us to begin working with Evofem right away while we complete additional due diligence in anticipation of the second tranche payment. It served well Evofem's needs, while enabling us to walk before we run.

And lastly, if we are to complete the full transaction, PDL expects to have a role in actively managing the investment. As PDL becomes one of Evofem's largest stockholders, I will take a seat on the Evofem Board of Directors. We will also be allowed to designate a nonvoting board of [shareholders.] We are very aligned strategically with Evofem leadership team and board, and we look forward to partnering with them to give the commercial structure and to execute the launch of Amphora. I am pleased to report that in the short time that we have been working together, we have established a very constructive relationship.

I want to acknowledge our team at PDL for bringing this transaction to fruition. They continue to review new areas of opportunity and consider a broad range of investment options in building our portfolio.

Turning to Slide 5. We remain deliberate in our selection of target opportunities, and we are highly disciplined in our diligence process. There were a number of factors that gave PDL an edge in capitalizing on this opportunity: First, our liquid balance sheet allows us to quickly deploy the necessary funds; second, our experience and speed enable us to be credible in the negotiation with Evofem; and third, we were flexible in our deal structure, rather than adhering to a strict acquisition or licensing blueprint related to start with a minority investment. Assuming our diligence is completed satisfactorily, we intend to make additional investments to fund the successful launch and further development of Amphora. In that process, we could progressively increase our ownership position and take an even greater role in enabling Evofem to deliver on its vision to build success as a leading women's health company.

Moving on to Slide 6. Let me provide a brief overview of the transaction terms. As described on -- in our April 11 press release, if this transaction fully completed, PDL will make a total investment in Evofem of $60 million. In tranche 1, we invested $30 million and we took approximately 6.7 million shares of Evofem's common stock and went on to purchase up to approximately 1.7 million shares of common stock at the exercised price of $6.38 per share. These warrants are exercisable for 7 years beginning 6 months after issuance date so we can exercise these warrants any time after October 11 of this year.

For tranche 2, should we exercise our right, we will make a second $30 million equity investment under the same terms as the first tranche. The second tranche is targeted to close on or before June 10, 2019. At that time, I will join the Evofem board as the PDL designee and we plan to appoint our Vice President of Business Development Doctor [Gill Jean] as our board observer. Alongside our investment, 2 of Evofem's leading institutional shareholders, Woodford Investment Management and Invesco Asset Management, have the right to invest up to $10 million each to purchase Evofem common shares.

So right to exercise the second tranche is subject to Evofem shareholder approval. We are delighted by the opportunity to invest along Woodford and Invesco. This flexible deal structure allows us the advantage of extending our capital as well as building relationship with these significant institutional investors that could translate into potential partnerships for future transactions.

It's estimated when this transaction is fully executed, Evofem will raise $80 million, which is expected to fund all planned activities in 2019 and into the second quarter of 2020. This includes completion of the NDA resubmission for commencement of precommercial activities for Amphora hormone-free birth control and the completion of the ongoing Phase IIb study for the prevention of chlamydia and gonorrhea in women.

Turning now to our share repurchase program on Slide 7. Last September, our Board authorized a $100 million share repurchase program. We have executed on this program by repurchasing 13.1 million shares of PDL common stock during the first quarter of 2019 at an average price of $3.38 per share or $44.4 million.

Subsequent to the first quarter, we have repurchased 2.8 million shares of common stock at an average price of $3.77 per share for a total of $10.4 million. To date, we have used $80.3 million to repurchase approximately 24.5 million shares at an average price of $3.27 per share. And we have $19.7 million remaining under the $100 million repurchase program.

We previously completed 2 share repurchase programs between 2017 and mid-2018 for a total of $55 million at an average price of $2.49 per share. We view stock repurchases as an appropriate means of creating shareholder value even with the discrepancies between our share price and our book value. And while our stock price has increased nicely, in fact by more than [13%] in the beginning of 2019, we still have a ways to go to close the valuation gap. We are disciplined in the management of our [purchasing] expenses as we strive to maximize the use of our financial resources for strategic investments.

We reduced our combined G&A sales and marketing and R&D operating expenses by 22%, including a 10% reduction in G&A in the first quarter of 2019 compared to the same period last year. Even with the execution of the $100 million stock repurchase program and our investment in Evofem, we have substantial cash on hand to execute on our future opportunities. We expect that cash flow generated by our current business will be in excess of operational need, thereby providing additional cash to invest in our future.

Let me now turn to a review of our current investment starting with LENSAR on Slide 8, where we continue to see quarterly progress. First quarter revenue for LENSAR of $6.7 million increased 35% on a 36% gain in procedural volume, both compared with the prior year. LENSAR was close to breakeven with a GAAP net loss of $1.2 million and a negative EBITDA of $600,000 for the quarter. We continue to be excited about LENSAR's growth potential supporting the refractive cataract surgery market. LENSAR systems offer a unique approach to help surgeons increase their efficiency and patient outcome in managing total active astigmatism, both pre-existing and surgically induced in their cataract procedures. [Branded as the easily accessed,] LENSAR utilizes property measurement and guidance technology for tourette's and other intraocular lens placement and alignment. LENSAR is a clear innovation leader in this space. In fact, LENSAR is becoming the laser of choice for surgeons in implanting intraocular lenses or IOLs that require greater accuracy and procedural customization to exceed patients' increasing expectations. We continue to believe in LENSAR's talented team. We are committed to support their R&D efforts to further enhance their technology and to seek additional 510(k) approvals for expanded indications.

Now turning to Slide 9. Noden Pharma is now focused on maximizing the value of [regulating] Tekturna by increasing profitability and mitigating the impact of generic competition. You may recall that in March, Noden introduced through their partner, Prasco Laboratories, an authorized generic version of Tekturna in the U.S. This was in response to pending January competition from Anchen Pharmaceuticals. This strategy has proven effective in giving us first-to-market advantage as Anchen has now launched its generic. We estimate that Prasco captured approximately 65% of the market for generic aliskiren at this stage. We believe that Prasco is the right partner for authorized generic given its ability to compete effectively. Prasco is the leader in the authorized generic market, with 51 brand partners and 89 authorized generic launches across 20 therapeutic categories with 13 of those launches in the past 2 years.

As aliskiren is both expensive and difficult to manufacture, we do not expect Noden will place an additional third-party generic competitor product to Tekturna beyond the generic product launch by Anchen. Given the anticipated generic launch and our focus on profitability, last August, Noden discontinued its U.S. contract sales force which will result in expense savings of $3.5 million to $4 million per quarter.

To maintain profitability post generic launch, Noden will cease promotional efforts in the U.S. in the second quarter of this year and it is in the process of restructuring the Noden U.S. team. This will result in further expense savings in the second half of 2019.

As [the next deck,] on international markets, I'm pleased to announce the imminent launch of Rasilez in China for Noden's partner, Lee's Pharma Holdings. We wish them much success in meeting the needs of Chinese patients who suffer from uncontrolled blood pressure. For the quarter, Noden was again profitable on a GAAP basis, with net income of $5.6 million.

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

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

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Thank you, Dominique. Please turn to our income statement on Slide #10. For the 3 months ended March 31, 2019, our GAAP net income was $6.7 million or $0.05 per diluted share. Total revenues were $38.9 million for the period and consisted primarily of product revenues of $26.7 million and net royalty payments from acquired royalty rights and a change in the fair value of a royalty right assets of $12.3 million. Our total revenues of $38.9 million for the first quarter of 2019 compared with $38.5 million for the first quarter of 2018.

Product revenues for the first quarter of 2019 increased 14% to $26.7 million from $23.3 million in the prior year period, with the increase primarily due to inventory stockings related to the authorized generic product launch of Tekturna in March.

Product revenues consisted of $20 million from Noden product sales, which consisted of $12.2 million in U.S. revenue and $7.8 million in the rest of the world, and LENSAR revenues for the quarter were $6.7 million. Revenues from the change in fair value of royalty rights were $12.3 million for Q1 of 2019 when compared with $11.1 million for the prior year period. The increase was related to a lower fair value reduction in 2019 when compared to 2018. Royalties from the Queen et al. patents for Tysabri were minimal in the quarter compared with $2.8 million in the first quarter of 2018, and we do not expect to report any meaningful Tysabri royalty revenue in 2019.

No interest revenue was recorded for the first quarter of 2019 compared with $749,000 in interest revenue for the first quarter of 2018, with the decrease due to CareView Communications not making interest payments on their loan in the 2019 first quarter.

Turning to operating expenses. For the first quarter of 2019, total operating expenses were $28.4 million, a $5.8 million decline compared with $34.2 million for the prior year period. The decrease in operating expenses was a result of a $4.7 million decrease in amortization expense from the Noden intangible assets as a result of the impairment recorded for those intangible assets in the second quarter of 2018. A $1.2 million reduction or 10% in the G&A expenses primarily due to lower professional fees and a $2.8 million reduction in sales and marketing expenses reflecting the cost savings from the change in marketing strategy for the Noden Products.

Offsetting these reductions were a $2.2 million increase in Noden Products and LENSAR cost of product revenue due to higher sales in both segments. A $600,000 favorable adjustment to the fair value of the contingent consideration recorded in the first quarter of 2018 with no corresponding adjustment in the first quarter of 2019 and higher Research and Development expenses in our Medical Devices segment.

Turning to our non-GAAP financials results on Slide 11. We adjusted our Q1 2019 GAAP net income of $6.7 million for the mark-to-market changes in fair value, amortization of intangible assets, contingent considerations and other noncash items. This resulted in non-GAAP net income of $11.9 million for the first quarter of 2019, which compares with $14.1 million for the prior year period.

Turning to our balance sheet on Slide 12. We had cash and cash equivalents of $366.3 million as of March 31, 2019, compared with $394.6 million as of December 31, 2018. This reduction in cash is a result of $44.4 million used for our stock repurchase program partially offset by positive cash flow from operations and royalties.

With regard to future guidance, given the recent launch of the authorized generic of Tekturna and competition from a third-party generic, we're not in a position to give guidance on product sales for 2019. However, based upon current asset values and royalty forecasts, we affirm our expectations of between $55 million to $65 million in cash royalties for 2019. We received $12.6 million in cash royalties for the first quarter of 2019, and we are also pleased to report $8.3 million received for Glumetza royalties for the month of April, which will be recognized in Q2.

With that financial overview, we're ready to open up the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Dominique P. Monnet, PDL BioPharma, Inc. - CEO, President & Director [2]

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While we're waiting for the first question, I'd like to mention our participation at 2 upcoming investment conferences, both in New York. We will be presenting at the UBS Global Healthcare Conference on March 21 (sic) [May 21] and at the Jefferies Global Healthcare Conference on June 4. Webcasts of our presentation we will be available on the website. Okay. Operator, we're ready for the first question.

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Operator [3]

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And your first question comes from the line of Phil Nadeau of Cowen Inc.

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Philip M. Nadeau, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [4]

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First on the Evofem transaction. In your slides, you mentioned that you could take an active role in Amphora. Could you talk a bit more about that? What could you do? Would that be an oversight management role or would it be possible that you participate in active promotion of the product?

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Dominique P. Monnet, PDL BioPharma, Inc. - CEO, President & Director [5]

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That's a good question, Phil. The active role we took first on the -- director position that I will be adding on the Board as well as the observer position that [Gill Jean] will have. In addition to that, really we have been working quite closely already with the Evofem team in looking for opportunities for us to bring value, and some of these areas are going to be for example on the IP side. I think we have a capability with Christopher who's an expert in IP, our general counsel, to be able to assist and to enhance the effort with the Evofem team. If you look at business development for example and that is maybe a little premature, but we are already looking at ways where we could bring to bear our capabilities to complete or complement what Evofem is doing because clearly, as a way to help them, again assuming that we would move forward with a second tranche to help them to accelerate their way to profitability, bringing additional products would be very helpful. And this is the thing that we do for a living. And in talking with Saundra and the team, I think clearly this is a place where they would value our assistance. And thirdly, and pretty frankly, it's a pleasure to engage with Russ, their CCO and his team. They are in an intense period of planning for the launch. So again, under the assumption that we would move forward to the second tranche, I personally would look forward to sitting down with him to exchange experience and see how we can just capitalize on each other's our experience. I hope that answered your question.

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Philip M. Nadeau, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [6]

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Yes. That's very helpful. And then maybe related question is long-term, how is this investment going to benefit the PDL shareholders? Is it simply an increase in the value of your equity stake or is there a long-term goal directive to someday consolidate the P&L and basically have the product revenue and net income for the PDL P&L?

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Dominique P. Monnet, PDL BioPharma, Inc. - CEO, President & Director [7]

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That's a great question, Phil. I think the -- it's a little maybe early for me to expand but clearly, when we talk about strategic investment, we are looking at being there, again under the assumption that we move forward with the second tranche. And that we would probably continue to move forward in helping to fund their launch, which could lead us to significant investment and again, increasing our ownership position if we were to assist also in bringing additional products, that maybe another way for us and it may not be the only one, as a way for us to increasing our ownership position. How far this will take us is a little early to tell. But if along the way, we continue to feel that this is an [therapeutic] space, which is a great fit for us that Evofem is truly the company we would like to consolidate opportunities we are exploring around, we may very well get to a much more integrated strategy and look at options to consolidate otherwise. But again, I really do think this is way too early to talk about this. What I think we're focusing on right now is the first and second tranche. Then it is going to be the filing with Evofem in the second half. And then it is going to be the launch. And that's going to be over the next 12 months to -- would be very intense on both sides.

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Philip M. Nadeau, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [8]

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Fair enough. That's very helpful. Then just last one financial question. The press release mentioned some Tekturna stocking in the quarter benefiting revenue. Peter, do you have any quantification of how much of the Tekturna U.S. revenue was due to stocking in the channel?

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [9]

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So let me give you a few numbers and we're still trying to figure this out, given it was just launched in March. But effectively, of the $20 million revenue, about $5.2 million was related to the launch of the authorized generic. About $2.8 million of that went to -- was related to what we believe is Prasco stocking, meaning it's still held with Prasco. And the remaining $2.4 million was shipped to wholesalers. So we don't know how much of that $2.4 million actually then went on to patients at this point in time. I -- and in addition, I should note that of that $5.2 million, about $1.8 million was also an adjustment to the gross to net to the negative, so that offset that $5.2 million in the quarterly numbers.

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Operator [10]

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Your next question comes from Maxim Jacobs of Edison Group.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [11]

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So I was just wondering, in terms of the profile for future investments, will they look kind of like Evofem? So not necessarily an outright buy out but maybe an equity stake?

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Dominique P. Monnet, PDL BioPharma, Inc. - CEO, President & Director [12]

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I think as we have said, we are quite flexible on the structure. I think we clearly strategically, we want to make sure that whatever structure we are engaging in for the partnership, it is as really a seat at the table. And more importantly, it gives us an opportunity to add value to the strategy and the operation. And so what we like in the Evofem, and as I mentioned, structure is it puts our capital to work directly to fund the operations. And Evofem clearly at this stage, in their life cycle has pretty heavy kind of need for funds. To be able to kind of put that to work to execute on their plans as opposed to buy out somebody else's share or, I don't know, the owner, I think feels very efficient, let's put it this way. This thing said, it's not going to be -- we aren't going to have a cookie cutter for everything. There may be a place for joint venture, there may be a place for licensing or both of them and if we find a company in the space that we like and there are a few of them that we look at quite in-depth right now, then we might very well continue to look for outright acquisitions. So it's -- I don't mean to be a wishy-washy thing but the structure is not we're focusing on. What we're focusing on is the asset and the team. We have expertise in capital. We need the other two parts to really make it a winning proposition. The structure is how do we manage to make that partnership work in the best interest of our shareholders.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [13]

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Okay. Great. That's very helpful. Just one more question on this. Just I mean what's the higher priority? Is it to kind of make sure the Evofem investment is maximized or is it to find other investments?

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Dominique P. Monnet, PDL BioPharma, Inc. - CEO, President & Director [14]

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Again, let me give you an answer that might be a little less than satisfactory. But it's both. We're building actually our BD team and across the board because BD, as you know is not just a function, it is a cross functional endeavor. And so what we're looking at is being able to do multiple transactions at the same time. There is no question that we spend a lot of efforts right now in Evofem. As you know, as you may recall from previous discussions, we tend to outsource quite a bit of this to extend all experts. We have a very good network of that, including regulatory, manufacturing and others. This being said it takes a lot of effort to coordinate and to integrate all of it. But at the same time, I can tell you, [Gill] and her team are very busy building the team further. And -- but we're also looking at additional transactions. And we certainly are hoping to be able to kind of make additional transaction between now and the end of the year. It's again, this is what we do for a living.

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Maxim Jacobs, Edison Investment Research Limited - Director of Healthcare Research for North America [15]

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Okay. Great. Yes, that was very helpful. And then just one last question, I thought the [Asurion] cash royalties fell in the quarter sequentially compared to last quarter, is that just a timing thing? Because I see that April looks pretty healthy.

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [16]

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Yes. So thanks, Max. This is Pete. So we had, in the first quarter, we actually -- they had pretty good what for the -- what's our January royalties. So that would be the Valeant/Bausch December sales. They had adjustments related to year-end in chargeback. So we had a relatively large credit that offset the royalties there. As you can see and as we mentioned with April, they're kind of going back up. They've been bouncing around anywhere between $3 million and now $8 million a month, so it's a little hard to forecast them.

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Operator [17]

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(Operator Instructions) And there are no further questions at this time. Please proceed with your presentation or any closing remarks. I'll turn the call back over to Mr. Dominique Monnet.

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Dominique P. Monnet, PDL BioPharma, Inc. - CEO, President & Director [18]

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Well, I just want to thank you all once again for joining us today, and we look forward to updating you on our progress at our upcoming investment conferences, the one I mentioned and when PDL reports our second quarter 2019 results in early August. In the meantime, I wish you all a wonderful end of the day.

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Operator [19]

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Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.