headache-1540220

Company to seek to monetize assets

PDL BioPharma 19 December 2019 Update
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PDL BioPharma

Company to seek to monetize assets

Development update

Pharma & biotech

19 December 2019

Price

US$3.32

Market cap

US$413m

Net cash ($m) at 30 September 2019

144.3

Shares in issue

124.4m

Free float

91.9%

Code

PDLI

Primary exchange

Nasdaq

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.3

52.3

17.7

Rel (local)

7.9

43.5

(6.1)

52-week high/low

US$3.85

US$2.13

Business description

As of December 2019, PDL has ceased to make additional strategic transactions and investments and is pursuing a formal process to unlock the value of its portfolio by monetizing its assets and ultimately distributing net proceeds to shareholders.

Next events

FDA approval of Amphora

May 2020

Analysts

Maxim Jacobs

+1 646 653 7027

Wiktoria O’Hare

+1 646 653 7028

PDL BioPharma is a research client of Edison Investment Research Limited

PDL BioPharma (PDL) has announced that following the completion of a strategic review process it has decided to cease additional strategic investments and monetize the company’s assets, returning net proceeds to shareholders. As the assets are not focused on any one area within healthcare, we believe they will likely need to be sold off piecemeal, which will lead to a relatively lengthy process (the company has estimated two to three years or longer). PDL’s stock has typically traded at a discount to its book value ($5.58 per share as of the end of Q319), so this should be a way to unlock the value of the company.

Year
end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

320.1

200.3

0.81

0.00

4.1

N/A

12/18

198.1

78.8

0.45

0.00

7.4

N/A

12/19e

102.6

(15.9)

(0.16)

0.00

N/A

N/A

12/20e

124.8

17.2

0.12

0.00

27.7

N/A

Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.

$275m share and convertible note repurchase

As part of its plan to maximize shareholder value, the company has initiated a $275m (upsized from $200m) share and convertible note repurchase program. As a reminder, PDL ended Q319 with $294.3m in cash and $150m in principal owed in the form of convertible debt. Utilizing this program, the company exchanged $119.3m in debt for $98m in cash and 13.4m shares of common stock and now has $30.7m in debt outstanding.

Positive Phase IIb data for Evofem

Evofem (29% owned by PDL) recently released positive and statistically significant data from its Phase IIb 860-patient AMPREVENCE trial of Amphora for the prevention of infection from Chlamydia trachomatis (chlamydia) and Neisseria gonorrhea (gonorrhea) in women. Use of Amphora led to a 50% relative risk reduction in chlamydia infection (p=0.024) and a 78% reduction in gonorrhea infection (p=0.03). Evofem expects to meet with the FDA and plans to initiate a Phase III in 2020, with anticipated approval in 2022. Additionally, Evofem recently resubmitted its application for the approval of Amphora for the prevention of pregnancy and a PDUFA date has been set for 25 May 2020.

Valuation: $767m or $6.17 per share

We have adjusted our valuation for PDL to $767m or $6.17 per basic share, from $730m or $6.39 per share, as we now include additional Amphora sales due to a label for the prevention of chlamydia and gonorrhea in our model. We assign a 50% probability of success and an additional $87m in peak sales for Amphora if chlamydia and gonorrhea prevention are added to the product labelling. The total value also benefitted from the recent note exchange though the per-share value fell due to additional shares issued as part of that transaction.

Strategic review completed

PDL initiated a strategic and financial review with an external advisor in September to provide an independent perspective on its business with regards to capital allocation and whether it should return additional capital to shareholders (the company recently completed its third stock buyback program, repurchasing around 32% of its shares since March 2017), focus capital on existing investments, or concentrate on making additional investments.

Following the completion of a strategic review process it has decided to cease additional strategic investments and monetize the company’s assets, returning net proceeds to shareholders likely in the form of additional stock repurchase programs and/or dividends. Given that the assets are not focused on any one area within healthcare, we believe they will likely need to be sold off piecemeal, which will lead to a relatively lengthy process (the company has estimated two to three years or longer). Also, we assume that the buyers of these assets will include both financial and industry players.

Amphora data in chlamydia and gonorrhea prevention

Evofem released positive and statistically significant data from its Phase IIb 860-patient AMPREVENCE trial of Amphora for the prevention of infection from chlamydia and gonorrhea in women. Over a four-month period, use of Amphora led to a 50% relative risk reduction in chlamydia infection as only 4.9% of women in the Amphora arm were infected compared to 9.8% of those in the placebo arm (p=0.024). For gonorrhea, 0.7% of those in the Amphora arm were infected versus 3.2% in the placebo arm, a 78% reduction (p=0.03). Importantly, the safety profile of Amphora remained attractive with slightly fewer adverse events in the Amphora arm (7.2%) than in the placebo arm (7.5%). The next steps for the company will be to discuss this data with the FDA at an end-of-Phase II meeting. Evofem currently expects to initiate the Phase III program in 2020 with approval in 2022.

Exhibit 1: AMPREVENCE Phase IIb efficacy data

Infection type

Number infected – Amphora arm (%)

Number infected – placebo arm (%)

p-value

Chlamydia

14 out of 288 patients (4.9%)

28 out of 287 patients (9.8%)

p=0.024

Gonorrhea

2 out of 280 patients (0.7%)

9 out of 277 patients (3.2%)

p=0.03

Source: Evofem

The addressable market is large with 1.8m new cases of chlamydia in 2018 (up 19% over 2014) according to the CDC. Gonorrhea had over 583,000 new cases in 2018, up 63% over 2014. Both infections may lead to serious complications if untreated as they can spread to the uterus and fallopian tubes and cause pelvic inflammatory disease (PID). PID can lead to chronic pelvic pain and permanent damage to the reproductive system.

While there is a large market and a medical need, we are not sure if women will specifically use Amphora for prevention of these sexually transmitted infections but believe they are more likely to use it to prevent both infection and pregnancy. Hence, our forecasts are based on the idea that infection prevention will make Amphora incrementally more attractive as a contraceptive (as neither hormonal contraceptives, spermicides nor intrauterine devices (IUD) have been shown to decrease infection rates), which is a much larger market. According to the CDC, 61.7% of the 60.9 million women aged 15–44 use contraception and 27.6% (around 16.8 million) use either short- or long-acting hormonal oral contraceptive pills or devices such as a ring or a patch.

Exhibit 2: Contraception method share in women aged 15–44

Source: CDC, National Center for Health Statistics, Data Brief number 173, December 2014

According to Evaluate Pharma, $6.5bn worth of hormonal contraceptives were sold in 2018 and importantly many still have meaningful sales despite being on the market for two to three decades and being off patent (see Exhibit 3). While generics exist, brand is important in this market.

Exhibit 3: Select marketed hormonal contraceptive products

Product

Generic name

Company

Launch year

Patent expiry

2018 sales ($m)

Mirena

Levonorgestrel

Bayer

1990

Dec 2015

1,350

Nexplanon

Etonogestrel

Merck & Co

1998

Sep 2009

703

Lo Loestrin FE

Ethinyl estradiol; ferrous fumarate; norethindrone acetate

Allergan

2011

Feb 2029

528

Yasmin

Drospirenone; ethinyl estradiol

Bayer

2000

May 2008

755

NuvaRing (vaginal ring)

Ethinyl estradiol; etonogestrel

Merck & Co

2002

Apr 2018

902

Source: Evaluate Pharma

Evofem recently resubmitted its application for the approval of Amphora for the prevention of pregnancy. The FDA acknowledged the receipt of the application and assigned a PDUFA date of 25 May 2020, by which time it is expected to make a decision on the application.

Valuation

We have adjusted our valuation for PDL to $767m or $6.17 per basic share, from $730m or $6.39 per share, as we now include additional Amphora sales due to a label for the prevention of chlamydia and gonorrhea in our model. We assign a 50% probability of success and an additional $87m in peak sales for Amphora if chlamydia and gonorrhea prevention are added to the product labelling. The total value also benefitted from the recent note exchange though the per-share value fell due to additional shares issued as part of that transaction.

We have not made any changes based on the announced change in company strategy but will do so as asset sales occur.

Exhibit 4: PDL valuation table

Royalty/note

Type

Expiration year

PDL balance sheet carrying value ($m)

NPV
($m)

Assertio (formerly Depomed)

Royalty on Glumetza and other products

2024

$265.0

$271.1

VB

Royalty on Spine Implant

Undisclosed

$14.5

$14.7

University of Michigan

Royalty on Cerdelga

2022

$21.2

$12.8

Wellstat

Note (Impaired)

Unknown

$50.2

$50.2

Hyperion

Note (Impaired)

Unknown

$1.2

$1.2

LENSAR

Equity

N/A

$65.2

AcelRx

Royalty on Zalviso

2027

$12.7

$10.8

CareView

Note (impaired)

2022

$11.5

$11.5

Noden

Equity

N/A

$34.8

$14.4

Kybella

Royalty

Unknown

$0.6

$0.7

Evofem

Equity

N/A

$67.2

$153.2

Total

 

 

 

$606

Net cash (Q319 + debt transaction and stock buyback) ($m)

$161.3

Total firm value ($m)

$767

Total basic shares (m)

124.4

Value per basic share ($)

$6.17

Total options (m)

0.0

Total number of shares (m)

124.4

Diluted value per share ($)

$6.17

Source: Edison Investment Research

Financials

PDL ended Q319 with $294.3m in cash and $150m in principal owed in the form of convertible debt. In September, the company exchanged $86.1m of its debt due in December 2021 for $86.1m in debt due in December 2024, leaving $63.9m in debt due in December 2021. In December, the company initiated a $275m (upsized later in the same month from $200m) share and convertible note repurchase program to return value to shareholders. Utilizing this program, the company repurchased $119.3m in debt in exchange for $98m in cash and 13.4m shares of common stock and now has $30.7m in debt outstanding ($19.2m in debt due in December 2021 and $11.5m in debt due December 2024). We expect this reduced debt to lead to lower interest expense in 2020 and have lowered our estimate from $12.0m to $2.5m. Also, due to these transactions, the company terminated portions of its capped call transactions related to the debt that provided cash proceeds to the company of $6.7m. Following the termination of these capped call transactions, the company entered into an agreement with Royal Bank of Canada (RBC) to repurchase 3.2m shares that RBC had been holding to hedge the capped calls. This stock was acquired at the closing price on 12 December 2019 so we estimate that this cost the company approximately $11.0m in cash.

We believe PDL has enough capital to execute on the remainder of the repurchase program and will be able to initiate additional repurchase programs (or dividends) once assets are monetized successfully.

Also, as a reminder, last quarter PDL took a $27.4m non-cash charge following a decline in the stock price of Evofem. Evofem’s stock has since recovered and if this is maintained through the end of the quarter, we would expect that non-cash charge to reverse in Q419.

Exhibit 5: Financial summary

$000s

2017

2018

2019e

2020e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

320,060

198,110

102,641

124,800

Cost of Sales

(30,537)

(48,460)

(52,540)

(53,106)

Gross Profit

289,523

149,650

50,102

71,694

General & Administrative

(63,324)

(62,559)

(53,494)

(55,634)

EBITDA

 

 

218,818

84,136

(10,343)

12,534

Operating Profit (before amort. and except.)

 

 

218,818

84,136

(10,343)

12,534

Intangible Amortisation

(24,689)

(15,831)

(6,320)

(6,320)

Other

0

0

0

0

Exceptionals

(349)

(118,899)

0

0

Operating Profit

193,780

(50,594)

(16,663)

6,214

Net Interest

(18,562)

(5,328)

(5,517)

4,636

Other

9,309

0

17,685

0

Profit Before Tax (norm)

 

 

200,256

78,808

(15,860)

17,170

Profit Before Tax (FRS 3)

 

 

184,527

(55,922)

(4,495)

10,850

Tax

(73,826)

(12,937)

(3,117)

(2,279)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

126,430

65,871

(18,977)

14,892

Profit After Tax (FRS 3)

110,701

(68,859)

(7,612)

8,572

Minority interest

(47)

0

0

0

Profit After Tax less Minority Interest (FRS 3)

110,654

(68,859)

(7,612)

8,572

Average Number of Shares Outstanding (m)

155.4

145.7

118.8

124.4

EPS - normalised ($)

 

 

0.81

0.45

(0.16)

0.12

EPS - FRS 3 ($)

 

 

0.71

(0.47)

(0.06)

0.07

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

90.5

75.5

48.8

57.4

EBITDA Margin (%)

68.4

42.5

(10.1)

10.0

Operating Margin (before GW and except.) (%)

68.4

42.5

(10.1)

10.0

BALANCE SHEET

Fixed Assets

 

 

602,680

446,519

427,203

384,008

Intangible Assets

215,823

51,319

47,349

47,349

Tangible Assets

7,222

7,387

6,917

8,165

Royalty rights

349,223

376,510

282,549

238,106

Other

30,412

11,303

90,388

90,388

Current Assets

 

 

640,443

517,217

320,695

397,902

Stocks

0

0

0

0

Debtors

31,183

21,648

12,581

12,581

Cash

527,266

394,590

208,076

285,283

Other

81,994

100,979

100,038

100,038

Current Liabilities

 

 

(193,109)

(52,470)

(44,139)

(44,122)

Creditors

(19,785)

(13,142)

(13,255)

(13,255)

Short term borrowings

(126,066)

0

0

0

Other

(47,258)

(39,328)

(30,884)

(30,867)

Long Term Liabilities

 

 

(204,124)

(181,487)

(85,001)

(85,001)

Long term borrowings

(117,415)

(124,644)

(30,700)

(30,700)

Other long term liabilities

(86,709)

(56,843)

(54,301)

(54,301)

Net Assets

 

 

845,890

729,779

618,758

652,787

Minority Interests

0

0

0

0

Shareholder equity

 

 

845,890

729,779

618,758

652,787

CASH FLOW

Operating Cash Flow

 

 

40,624

(13,425)

(22,696)

(10,430)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(1,297)

(4,523)

(2,545)

(1,248)

Acquisitions/disposals

128,415

57,969

84,110

88,885

Financing

0

0

0

0

Dividends

(222)

(48)

0

0

Other

212,592

(46,202)

(139,932)

0

Net Cash Flow

380,112

(6,229)

(81,063)

77,207

Opening net debt/(cash)

 

 

85,289

(283,785)

(269,946)

(177,376)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

(11,038)

(7,610)

(11,507)

0

Closing net debt/(cash)

 

 

(283,785)

(269,946)

(177,376)

(254,583)

Source: PDL BioPharma accounts, Edison Investment Research

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This report has been commissioned by PDL BioPharma and prepared and issued by Edison, in consideration of a fee payable by PDL BioPharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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General disclaimer and copyright

This report has been commissioned by PDL BioPharma and prepared and issued by Edison, in consideration of a fee payable by PDL BioPharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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