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Edited Transcript of PDLI earnings conference call or presentation 6-Nov-18 9:30pm GMT

Q3 2018 PDL BioPharma Inc Earnings Call

INCLINE VILLAGE Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of PDL BioPharma Inc earnings conference call or presentation Tuesday, November 6, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominique P. Monnet

PDL BioPharma, Inc. - President

* Jody Cain

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

* 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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* 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

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Presentation

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Operator [1]

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Welcome to the PDL BioPharma Third Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded November 6, 2018. I would now like to turn the conference over to Jody Cain. Please go ahead, ma'am.

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

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This is Jody Cain with LHA. Thank you all for participating in today's call. Please note that a slide presentation to accompany management's prepared remarks is available on the Investor Relations section of the PDL website at PDL.com. Joining me today from PDL BioPharma are John McLaughlin, Chief Executive Officer; Dominique Monnet, President; 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, November 6, 2018. 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 John McLaughlin. John?

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

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Thanks, Jody, and good afternoon, everyone. I'm pleased to report revenues of approximately $68 million for the third quarter, representing an 8% increase over the prior year period. Among quarterly highlights, product revenues were approximately $24 million, up 22%, which include contributions from the Noden products and LENSAR Laser System sales. The increase in product sales reflects our change in strategy to equity and product investments. Later in this call, Dominique will provide details about the Noden products, and I will discuss updates on LENSAR.

Turning to Slide 3. I'd like to highlight the transaction we completed in August, where we paid $20 million for all of the remaining rights to royalties and milestones payable on sales of type 2 diabetes products licensed by Assertio Therapeutics, formerly known as Depomed.

In the third quarter of 2018, we recognized approximately $42 million in revenue from royalty rights, a change in spare value, which is primarily due to an increase in the fair value of the Assertio royalty asset as a result of purchasing the remaining rights. We benefited from our particularly strong commercial showing during the quarter from the type 2 diabetes drug, Glumetza, part of the Assertio asset. Overall, I'm pleased to report the Assertio royalty asset continues to perform substantially better than we expected, with cash receipts received through September 30, 2018, of approximately $361 million from our initial investment of $240.5 million.

Turning to Slide 4. As you may know, in July, we completed our $25 million share repurchase program. And in September, our Board of Directors authorized a new $100 million program. To date we've been unable to repurchase shares under the new program due to being in a blackout period related to our quarterly financial results. Our plan is to aggressively execute on share repurchases when this blackout period ends. This is our third and largest stock repurchase program to date, having completed a $30 million program in June 2017 and a subsequent $25 million program earlier in this year's third quarter.

We view the 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, our book value is $5.07 based on our Q3 financial results, as depicted on Slide 5. That said, we have not lost sight of our strategic focus on creating long-term shareholder value through equity and product investments. We continue to seek additional transactions for products and companies with a primary focus on pharmaceuticals. We remain confident in our ability to consummate excellent deals on attractive terms and put acquired assets on the path to success.

You may have read in our financial results press release just issued that I've informed the Board of Directors of my intention to retire as CEO of PDL at year-end 2018 while continuing to serve on the PDL board. It's been an honor and a pleasure to serve PDL and its shareholders for a decade. I look forward to continuing my service to the company's shareholders as a director.

I'm pleased to announce that PDL's President, Dominique Monnet, has been named my successor as CEO effective December 31, 2018. Over the past year, working with Dominique, I've been very impressed with his knowledge of the biopharmaceutical industry and his leadership skills. He is a seasoned and savvy executive. We anticipate a smooth transition. I speak for the full board of PDL in expressing our confidence that he is the right leader to guide PDL going forward.

With that, I'd like to turn the call over to Dominique Monnet.

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

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Thank you, John, for those kind words. I am honored and delighted that the PDL Board of Directors has chosen me to succeed John as CEO. I am excited about leading the PDL team to execute our strategy for growth. As John mentioned, we are focusing on building value for our shareholders through the acquisition of biopharma assets with clear upside potential and through strategic partnerships for the successful development and commercialization of such assets.

Consummating the right transaction requires a very deliberate engagement, and we have worked hard to sharpen our business development process, integrating lessons learned from our past transactions and adapting to our fast-changing environment. I am excited both by the opportunities we are currently evaluating and by the high-quality team we have assembled to execute our strategy. We will continue to be very disciplined.

On 3 separate occasions over the past few months, we were in advanced negotiation to close substantial transactions. In each circumstance, we decided not to proceed as our diligence have had issues we could ultimately not get comfortable with. Our shareholders may feel confident that however focused we are to making deals, our commitment is to make the right deals for the right assets at the right price.

Please turn to Slide #6. What transaction are we pursuing? At this stage, considering that we are pretty much a blank slate, we can afford to consider a wide range of opportunities as long as they have the following potential: generate profitable revenue growth, deliver attractive risk-reward returns on our invested capital; and finally, leverage our expertise in the biopharma space.

Let me outline some of the key categories of assets we are looking at in priority. Firstly, products or companies that have the potential of generating growing, profitable revenue streams. I have launched and commercialized products across a large number of therapy areas and geographies in my 35-year career in the biopharma industry. We have the opportunity to be fairly agnostic at this stage, although it is clear that the U.S. market is a primary focus. We seek assets with clear and sustainable value propositions, competitive differentiations and IP or other forms of protection such as manufacturing or technological know-how.

Second, companies that have a strong commercial franchise that may be expanded through acquisitions. I had the privilege to lead teams that helped grow Schering-Plough's allergy and oncology franchise, established Amgen's international hemato-oncology and nephrology franchises and helped expand Alexion's rare disease franchise. Strong franchises are strategic and operational value that can be capitalized on.

Thirdly, technological platform that may lead to multiple differentiated product application. This is what PDL was ultimately built on when it was known as Protein Design Labs. It fits in our corporate DNA. (inaudible) I started my own career at AESCA Corporation, at that time a leading pioneer in advanced drug delivery systems with its oral and transdermal delivery technologies. Technological platforms are uniquely attractive.

Fourth, pre-commercialization products. We have so far [elected] to consider development of clinical-stage assets due to the inherent risks associated with medical innovation. This being said, I spent a significant part of my career in global marketing leadership roles, partnering with R&D scientists to advance products from preclinical stage through clinical development, to commercial launch, and ultimately, life cycle management. I had the privilege to lead the global marketing and commercial development team at Amgen at the time when the company was moving an unprecedented number of early-stage compounds through its then industry-leading pipeline. This is not out of priority, and we will advance very cautiously in this area, but we might consider development-stage assets that present attractive risk-reward profiles.

So what are our strengths in competing for such assets? First, our capital ready to be deployed. Even with our planned execution on the $100 million stock repurchase program, we have substantial cash on hand to execute on this strategy. We will also be prepared to bring in some minority financing partners if necessary. Finally, we expect continued generation of cash flows in our current business in excess of our personal need that we provide additional cash to invest in our future.

Second, our team. We have a very experienced leadership team with an established track record of consummating successful transaction and delivering shareholder value through outstanding strategic and operational execution. We have continued to strengthen our team with some great additions over the past few months.

Third, our nimbleness and flexibility. We are deliberating our diligence process that, with the support of the PDL board, we can advance and make quick decisions. We can also be flexible with regard to deep structures that appeal financially to the other parties involved in the transaction. For example, we may consider a joint venture if the other party wants to share the upside that we remain involved for some strategic reason. Nimbleness and flexibility are proving to be significant points of differentiation versus our competition.

Turning now to an update on Noden Pharma on Slide 7. Product revenues for Tekturna and Rasilez were $17.8 million for the third quarter. This is an 18% increase over the prior year period. The portion of this increase is related to the termination of the profit transfer arrangements with Novartis ex U.S, which was substantially completed in November 2017. Of the $17.8 million in Noden revenues in Q3, $9.7 million were from U.S. sales of Tekturna and the remaining $8.1 million were from Rasilez sales in the rest of the world.

You may recall that in June 2018, Noden reached a settlement agreement granting Anchen Pharmaceuticals a nonexclusive royalty-free license to manufacture and commercialize a generic version of aliskiren in the U.S. In return, Anchen agreed not to commercialize its generic version of aliskiren prior to March 1, 2019. We have no update on Anchen's progress in developing a generic aliskiren, but there is yet to be an FDA approval of a generic version of the drug and there have been no announcements on commercialization plans or dates.

We are currently planning an authorized generic version of Tekturna that we will launch to effectively compete to the generic competitor into the market. We will provide additional detail in the future.

At the time we purchased the Noden assets from Novartis in 2016, Tekturna sales were rapidly declining. We hired a contract sales force, and under the direction of the Noden U.S. commercial team, we successfully stabilized prescription for Tekturna. Given the possibility for generic entry in 2019 and weighing the cost benefits of the sales force, we made the decision to discontinue our direct sales force in early August of this year.

We transitioned at that time to a comprehensive, more cost-efficient program of nonpersonal promotion in partnership with Archer Healthcare and under the leadership of the Noden U.S. commercial team. This program is conducted through e-mail, direct mail and telesales pharma representatives. While not much has elapsed since this transition, we are cautiously optimistic about future Tekturna revenues given that sales remain relatively stable throughout the third quarter.

Additionally, this new sales strategy implemented halfway through the third quarter reduced costs by $1.6 million, increasing profitability. For the quarter, Noden was profitable on a GAAP basis, with net income of $4.1 million and EBITDA of $5.6 million.

We continue to support physicians who rely on Tekturna to control their patients' blood pressure with samples as well as our voucher program and co-pay cards. Pending generic entry, we are also committed to maintaining Tekturna's strong managed care access for both commercial and managed care patients.

Internationally, sales of Rasilez are starting to plan. In partnership with our distributor, Lee's Pharma Holdings, we're looking forward to the launch of the product in China in the first half of 2019.

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. We are delighted with our continuing quarterly progress at LENSAR. You may recall that we began recognizing revenues from LENSAR in May of 2017.

Turning to Slide 8. Revenues from LENSAR for the third quarter of 2018 were $6.6 million, which is a 33% increase from the prior year and a 13% increase from the second quarter of 2018. While LENSAR reported a GAAP net loss of approximately $900,000 in Q3, they were effectively breakeven on an EBITDA basis for the quarter. On the business side, LENSAR sold 7 systems, including 2 systems in the U.S., 3 systems in China and 2 systems in South Korea.

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 [6]

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Thank you, John. Please turn to our income statement on Slide #9. For the 3 months ended September 30, 2018, our GAAP net income was $25.6 million or $0.18 per share. The total revenues were $67.9 million for the period and consisted of product revenues of $24.4 million, net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets of $42.2 million, royalties from PDL's licenses to the Queen et al. patents of $533,000 and interest revenue from notes receivable investment to CareView Communications of $754,000.

The total revenues of $67.9 million for the third quarter of 2018 compare with $62.7 million for the third quarter of 2017, with the increase reflecting higher product sales due to the change in our strategy to a pharmaceutical business model as well as an increase in royalty rights change in fair values from the Assertio Therapeutics royalty rights, modestly offset by the decline in royalties from the Queen et al. patents and lower interest revenue as a result of the sale of the kaleo note receivable in September of 2017.

Product revenues for the third quarter of 2018 increased 22% to $24.4 million from the prior year period and consisted of $17.8 million from Noden product sales and $6.6 million from LENSAR sales. Product revenues in the third quarter of 2018 accounted for 36% of total revenues, up from 32% of total revenues in the third quarter of 2017.

Revenues in royalty rights change in fair value were $42.2 million for Q3 of 2018, up from $35.4 million for the year-ago period, which was primarily related to revised future cash flows of the Assertio royalties. We received $19.1 million in net cash royalties for the third quarter of 2018.

Royalties from the Queen et al. patents were $533,000 in the quarter, which consisted of royalties earned on the sales of Tysabri, the last products for which we received royalties. This compares with $1.4 million in Queen et al. patents royalties in the third quarter of 2017. As previously announced, U.S. product sales of Tysabri manufactured prior to the patent expiry has ceased and ex U.S. product sales are rapidly being depleted. We expect that there will be no remaining Tysabri royalties paid beginning in 2019.

Interest revenues for the third quarter of 2018 of $754,000 compares with $6.1 million for the third quarter of 2017.

Turning to operating expenses. For the third quarter of 2018, total operating expenses were $31.2 million compared with $30.1 million for the prior year period. Sales and marketing expenses were $3.5 million for the third quarter of 2018 compared with $5 million for the prior year period.

Moving on to our year-to-date results on the same slide. For the 9 months ended September 30, 2018, total revenues were $153 million, which compares with $252 million for the 9 months ended September 30, 2017.

Product revenues were $79.5 million, a 54% increase from $51.5 million for the prior year period. Product revenues in 2018 consisted of $62 million from the sale of Noden products and $17.5 million from product sales of the LENSAR Laser System.

Net royalties -- net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets was $66.1 million for the 9 months ended September 30, 2018. And this compares with $132.2 million for the year-ago period. Year-to-date in 2018, PDL has received $57 million in net cash royalties.

Royalties from PDL's licensees to the Queen et al. patents to date in 2018 were $4.5 million, and interest revenue from the note receivable investment to CareView Communications was $2.3 million in the first 9 months of 2018.

Operating expenses for the 9 months ended September 30, 2018, were $237.1 million compared with $88.1 million for the prior year period. The increase primarily resulted from the impairment of the Noden product intangible asset of $152.3 million from Q2 2018 as well as the Noden products and LENSAR sales contributing additional costs of product revenue of $20 million and $4.4 million, respectively, and recognition of cost of product revenue for ex U.S. revenue and increased revenue from the LENSAR Laser System, which did not begin to be recognized until May of 2017. These year-over-year increases in operating expenses were partially offset by the decrease in fair value of the contingent liability for the Noden products.

Turning to our non-GAAP financial results on Slide #10. We adjusted our GAAP net income of $25.6 million for the after-tax impact of 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. This resulted in non-GAAP net income of $12.3 million for the third quarter of 2018, which compares with $21.7 million for the prior year period.

Year-to-date, we adjusted our GAAP net loss of $85.1 million for the first 9 months of 2018 with the same adjustments as the third quarter plus the adjustment for impairment of intangible assets and contingent considerations, which resulted in non-GAAP net income of $41.8 million, which compares with non-GAAP net income of $73.7 million for the prior year period.

Turning to our balance sheet on Slide #11. We had cash, cash equivalents and investments of $401 million as of September 30, 2018. Our increase in cash flow from operations and royalties for Q3 was offset in the quarter by our onetime $20 million payment to Assertio for the remaining royalty rights and $1.4 million to complete the $25 million stock repurchase program.

Before opening the call for questions, I'd like to welcome Edward Imbrogno to PDL. Ed has joined us as our Vice President of Finance from BioDelivery Sciences International and has extensive experience structuring mergers and acquisitions and in post-acquisition accounting, which is a tremendous skill set that we -- as we execute our business strategy of acquiring and managing a portfolio of companies, products and royalty agreements.

With that, we're ready to turn the call over for questions. Operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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John Peter McLaughlin, PDL BioPharma, Inc. - CEO & Director [2]

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Operator, while we're waiting for our first question, I'd like to mention that we will be in San Francisco for the annual JPMorgan Healthcare Conference, and we'll be holding one-on-one meetings. The dates for the 2019 conference are January 7 through 9. And please give LHA a call if you'd like to schedule a meeting with us. Okay, operator, we are ready for the first question.

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Operator [3]

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Our first question comes from Phil Nadeau with Cowen and Company.

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

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John, first, congrats on your retirement. Well deserved. Hope you enjoy your post-PDL life. Dominique, a couple of questions for you. You mentioned in your prepared remarks that you'd actually consider developmental-stage candidates or developmental-stage programs as you look to in-license and acquire. That seems to be a bit of a change from how PDL has operated historically. Can you talk a bit more about the rationale for considering such assets? And in particular, what would be of interest to you? It's too early. What are these areas would you not care about?

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

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Yes, great questions. I think, clearly, this is an evolution of our strategy, and that evolution comes from lessons learned from our transaction and as well as other transactions that we have observed. Clearly, there is a different type of risk with development of clinical-stage compounds. I have been used to explore those and weigh them over my career in a number of occasions. At this point, we are not truly excluding any therapy areas. Frankly, what we are looking at is what is the time for us which would be where we could -- the time period we could maximize the value built for our shareholders. And as you know, you can place some bets, but if you manage to buy an attractive asset around late Stage I and ultimately bringing to a late Stage II and prior to getting it to Phase III, this is a very -- this is a great opportunity to build a lot of shareholder value. I think the key is to be able to find assets which have been already derisked to a maximum. We can move very cautiously in this area. We will have to draw on a lot of external expertise to be able to consider them. But what we wanted to message is that we are going to continuously evolve in our strategy perspective. I think our goal is to build shareholder value through these acquisitions. We are pretty agnostic on a number of points. We have actually the luxury of being that -- of doing this. But again, we are going to be very cautious, understanding that this is an area of a very different kind of risk as the one we have taken in the past.

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

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That's fair enough. And then second question on in-licensing or acquiring commercial assets. Now that you no longer have the Tekturna sales force, would you be interested in products that require a sales force? Or will those be less attractive to you these days?

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

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No, I think it would continue to be -- I mean, again, from that perspective, we are looking at 2 major, I would say, different buckets. Those companies of old assets, we could require a totally different organization. And this may already be exiting, and we would acquire them with the products and if we see them as being effective. But for example, requiring more capital to be able to lead us to their maximum potential, that's where we will be focusing our efforts. And often, there are some change of staffing, which are associated with those, but they may be major or minor. But essentially, the idea here will be to create additional stand-alone operating companies, and whether they need sales force -- sales force or not, we would be exploring that at the time. With regard to Noden, we continue to look for additional assets to put in it. We have built a high-quality team at the international level. We do not have a sales force. But as we did when we acquired Tekturna, it is not a difficult thing to build out if you take a contract sales force. And today you can really do that and get some very professional and very effective sales representatives. So again, we are looking at this different asset, continuing to see the Noden platform as one we would like to leverage. And we would like to leverage it again because of the talent that we have built around it more than anything else.

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Operator [8]

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Our next question comes from Maxim Jacobs with Edison Group.

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

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Firstly, I just want to say congratulations to Dominique, and congratulations to John on getting some time off. So just my first question is just, what was behind the decrease in the OUS Noden revenues? Was it just kind of lumpiness in bulk buying from OrphanPacific?

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [10]

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Yes, so that's exactly right. This is Pete. So in the second quarter, as you remember, it was a little bit higher than normal and it was launching effectively in Japan with the product there and the way that we recognize revenue.

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

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And did you get -- have you gotten any feedback on just how that launch is going? Or should we look forward to more kind of bulk purchases in the future?

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Peter S. Garcia, PDL BioPharma, Inc. - VP & CFO [12]

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I think this quarter will probably be more representative going forward, but it's still early days.

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

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Okay. And then just -- are there any metrics that you can share on the Archer Healthcare marketing push?

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

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It is still early on. We're actually in the process of evaluating it because now we have been implementing it for 3 months, not exactly. I think it's going to be 3 months at the middle of this month. There are a number of metrics which have been encouraging. For example, their delivery of the samples. In 75% of the calls at the Archer sales representatives placed, we had physicians asking for samples, which is probably the best indication of wanting to continue to put patients on Tekturna. If you look actually at our NRx, we have not seen since the introduction of the sales force actually a decline in our NRx. So again, that's an encouraging metrics. It is not a perfect one, as you know, but I think it is generally something which is promising at this point. Overall, there is a very good response to this nonpersonal promotion. We focus with nonpersonal promotion on the 11,000 prescribers of Tekturna, whom we thought were the most productive. So I think clearly, we are looking at a more receptive kind of audience. But so far, it is encouraging. But we'll be able to tell you more during the next call in 3 months' time.

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Operator [15]

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(Operator Instructions)

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Dominique P. Monnet, PDL BioPharma, Inc. - President [16]

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So if there are -- go ahead.

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Operator [17]

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There are no further questions at this time. Mr. Dominique Monnet, please proceed with the presentation or any closing remarks.

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

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Thank you very much. Thank you all once again for joining us today, and we look forward to updating you on our progress when PDL reports fourth quarter and full year 2018 results in early March of next year. In the meantime, have a great day and a great holiday season.

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Operator [19]

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Ladies and gentlemen, that concludes your conference call for today, and we thank you for your participation and ask that you please disconnect your lines at this time.