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PDLI Guides Q4 Royalty Rev to $86M

Zacks Equity Research

PDL BioPharma Inc. (PDLI) recently announced that it expects to generate fourth quarter 2012 royalty revenues of $86 million, up 17.8% year over year.

PDL BioPharma receives royalties on worldwide net sales of Roche Holdings Ltd.'s (RHHBY) Avastin and Herceptin; Roche/Novartis’ (NVS) Lucentis and Xolair; and Elan Corporation/Biogen Idec’s (ELN /BIIB) Tysabri. Moreover, the royalty revenues to PDL BioPharma for the final quarter of 2012 are also expected to include royalties worth $0.25 million from the sales of Roche’s Perjeta (pertuzumab). We note that the US Food and Drug administration cleared Perjeta in June 2012 for treating patients suffering from HER2-positive late-stage (metastatic) breast cancer.

Royalty payments for all Roche’s products are tiered in the US, while PDL BioPharma receives a flat 3% royalty if a product is both manufactured and sold outside the US. Tysabri royalties are calculated at a flat rate as a percentage of sales, irrespective of the manufacturing or sales location.

The anticipated growth in royalty revenues primarily emanates from the higher sales of Herceptin (up 15.2%), Avastin (up 13%) and Lucentis (up 3%) during the third quarter of 2012, on which PDL will receive royalties in the fourth quarter. PDL BioPharma is also expected to benefit from the inclusion of Perjeta royalties in the fourth quarter of 2012.

Effective from the second quarter of 2011, PDL BioPharma started paying back a portion of the royalties it receives on Lucentis sales outside the US to Novartis. The payment is made in accordance with a settlement agreement, which the companies had entered into in February 2011. The fourth quarter 2012 revenue guidance is net of this payment.

For full-year 2012, BioPharma expects to generate revenues of $374 million, up 3.3% year over year.  The revenue guidance for 2012 is above the Zacks Consensus Estimate of $367 million.

Our Recommendation

Currently, we have an Underperform recommendation on PDL BioPharma. The stock carries a Zacks #4 Rank (“Sell”) in the short term.

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