PDL BioPharma |
Depomed paying off |
Financial update |
Pharma & biotech |
10 August 2017 |
Share price performance
Business description
Next events
Analysts
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PDL BioPharma recently reported strong Q217 earnings mainly due to royalties related to the authorized generic of Glumetza as well as an increase in the fair value of the Depomed royalty assets as a whole. Also, LENSAR, which became a wholly-owned subsidiary on 11 May, was consolidated in the results, with $2.6m in revenues and $3.8m in expenses. The company continues to receive royalty payments for Tysabri for longer than expected; it was paid $16.3m in Q217.
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
590.4 |
530.1 |
2.04 |
0.60 |
1.3 |
22.7 |
12/16 |
244.3 |
175.5 |
0.78 |
0.10 |
3.4 |
3.8 |
12/17e |
264.2 |
157.9 |
0.59 |
0.00 |
4.5 |
N/A |
12/18e |
122.2 |
19.9 |
0.14 |
0.00 |
18.9 |
N/A |
Note: *PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.
Tekturna transfer process continues
The company is continuing to work on transferring the marketing authorizations for Tekturna/Rasilez from Novartis to Noden (PDL currently owns 100% of Noden). The transfers for the EU, Switzerland, Canada and Japan are expected to occur in Q417. In the US, Q217 was the first full quarter in which the company had a contract salesforce selling Tekturna, though sales have continued their multi-year decline. It is too early to tell if the contract salesforce is having any impact.
LENSAR now included in financial statements
As of May 11, 2017, LENSAR, a laser cataract surgery system company, is a wholly owned subsidiary of PDL. Both revenues and expenses are relatively low but importantly there are $114m in net operating loss carryforwards that the company can utilize to lower its tax payments.
New share repurchase program under consideration
In March, PDL announced a $30m share repurchase program that would last until March 2018. The company has already utilized all $30m to buyback 13.3m shares at an average cost of $2.25 per share and is evaluating the possibility of a new program. With a book value approximately double the stock price, this would make a tremendous amount of sense.
Valuation: $793m or $5.15 per share
Our valuation has changed to $793m or $5.15 per share, from $816m or $5.07 per share. The total value declined as we are taking a more conservative view of Noden’s potential as well as slightly lower Avinger and Kybella valuations. This was partially offset by a higher cash balance and an increase in value for LENSAR, as the debt has converted to equity and we are able to include the net operating loss carryforwards. The value on a per share basis increased due to a reduction in the number of shares following the buyback.
Quarterly update
PDL recently reported results for Q2 and provided an update on numerous assets. Revenue from the change in fair value of royalty rights was $83.7m, up from $13.1m in Q1. This was primarily due to royalties received as a result of the launch of the authorized generic in February 2017 as well as an increase in the fair value of the Depomed assets, which includes Glumetza, from $161.6m last quarter to $215.8m. The Depomed assets have now returned $253.1m in cash, which is above their initial investment of $240.5m just 3.5 years ago.
With regards to Noden, the company is continuing to work on transferring the marketing authorizations for Tekturna/Rasilez from Novartis. The transfers for the EU, Switzerland, Canada and Japan are expected to occur in Q417. Until that happens, PDL books revenue outside the US net of cost of goods as well as a separate fee to Novartis. This quarter, PDL booked $2.9m in revenue outside the US. In the US, Q217 was the first full quarter in which the company had a contract salesforce selling Tekturna. Prescriptions continue their multi-year downward trend, falling around 10% as compared to Q117. It is too early in the launch to tell if the contract salesforce is having any impact.
For the first time, LENSAR is now being consolidated in PDL’s financial statements. As a reminder, it is a laser cataract surgery system company, which filed for voluntary bankruptcy with the co-operation of PDL in December 2016. It emerged out of bankruptcy on 11 May 2017, and as most of PDL’s debt was converted into company equity, LENSAR became a wholly owned subsidiary. Revenues for the partial quarter (11 May to 30 June) were $2.6m and expenses were $3.8m. Importantly, there are $114m in net operating loss carryforwards that PDL can utilize to lower its tax payments.
Notably, the company reported $16.3m in royalty revenue from the Queen et al. royalty stream. This revenue is based on the sales of Tysabri over Q117. The royalty agreements for the other Queen et al. products have stopped, but the royalties for Tysabri are tied to product manufactured during 2014. Biogen continues to draw down this inventory, which will likely provide additional revenue. We do not include this revenue in our forecasts and valuation due to lack of insight into these inventory levels and the fact that these payments could stop at any time though they have continued far longer than originally expected.
In addition, PDL received a one-time, lump-sum payment of $19.5m in exchange for a royalty-free, non-exclusive license to certain Queen et al. patent rights as part of a patent settlement with Merck related to Keytruda, its humanized antibody product for various cancers.
Finally, with regard to the note agreements, the company previously wrote off $51.1m of its Direct Flow Medical assets in Q416 and has been able to monetize $8.1m of assets so far this year. There remain $1.9m worth of foreclosed assets that are being recorded as assets held for sale (but no carrying value within notes receivable). CareView, with which PDL entered into a credit agreement in 2015 for up to $40m in two tranches, will not be receiving the second tranche of $20m as the company did not hit previously agreed upon product placements and financial targets. However, it remains current on interest payments for the first $20m tranche.
Valuation
Our valuation has changed to $793m or $5.15 per share, from $816m or $5.07 per share. The main driver for the lower total valuation was more conservative assumptions for Tekturna as the sales downtrend is continuing despite the contract salesforce coming on line. This reduced our value for Noden from $103.5m to $53.4m. We have also reduced the value of the Kybella royalty from $5m to $1.7m as sales appear to have plateaued much sooner than expected. The Avinger asset also fell from $2.2m to $1.3m simply due to the fact that it is set to expire next year so there are just fewer payments left. This decline in total value was partially offset by a higher cash balance and an increase in value for LENSAR, as the debt has converted to equity and we are able to include the net operating loss carryforwards (which account for the vast majority of the value of that asset based on our estimates). The value on a per share basis increased due to a reduction in the number of shares following the share buyback.
Exhibit 1: PDL valuation
Royalty/note |
Type |
Expiration year |
PDL balance sheet |
NPV ($m) |
Queen et al |
Royalty |
2015 |
N/A |
N/A |
Depomed |
Royalty on Glumetza and other products |
2024 |
$215.8 |
$231.3 |
VB |
Royalty on Spine Implant |
Undisclosed |
$15.3 |
$17.7 |
University of Michigan |
Royalty on Cerdelga |
2022 |
$35.6 |
$12.7 |
Wellstat |
Note (impaired) |
Unknown |
$50.2 |
$50.2 |
Hyperion |
Note (impaired) |
Unknown |
$1.2 |
$1.2 |
Avinger |
Royalty |
2018 |
$1.1 |
$1.3 |
Lensar |
Equity |
N/A |
$54.6 |
|
Kaleo |
Note |
2029 |
$146.7 |
$153.6 |
AcelRx |
Royalty on Zalviso |
2027 |
$71.8 |
$72.5 |
CareView |
Note |
2022 |
$19.1 |
$20.7 |
Noden |
Equity |
N/A |
N/A |
$53.4 |
Kybella |
Royalty |
Unknown |
$3.4 |
$1.7 |
Total |
|
|
|
$671 |
Net cash (Q217) ($m) |
$122.5 |
|||
Total firm value ($m) |
$793 |
|||
Total basic shares (m) |
154.1 |
|||
Value per basic share ($) |
$5.15 |
|||
Total options (m) |
0.7 |
|||
Total number of shares (m) |
154.8 |
|||
Diluted value per share ($) |
$5.13 |
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Source: Edison Investment Research
Financials
PDL reported revenue of $143.8m, up significantly from $45.4m last quarter due mainly to a jump in the fair value of the Depomed royalties and the $19.5m settlement payment from Merck. As a result of this, we have increased our estimated 2017 revenues from $182.1m to $264.2m. However, we have lowered our 2018 revenue estimates from $142.2m to $122.2m, mainly due to lower Tekturna estimates. R&D and SG&A spending totaled $19.2m in Q217, up from $16.9m in Q117, mainly due to the consolidation of LENSAR expenses. The company ended the quarter with $349.4m in cash, $10.9m in short-term investments and $75m in a long-term certificate of deposit, which serves as collateral for the remaining portion of the Tekturna acquisition cost due to Novartis. That $75m long-term certificate of deposit has since been terminated (along with an additional $14m guarantee to Novartis) as the $89m anniversary payment was made on 3 July 2017, after the end of the quarter.
In March, PDL announced a $30m share repurchase program that would last until March 2018. The company has already utilized all $30m to buy back 13.3m shares at an average cost of $2.25 per share and is evaluating the possibility of a new program. With a book value approximately double the stock price, this would make a tremendous amount of sense.
Exhibit 2: Financial summary
$000s |
2015 |
2016 |
2017e |
2018e |
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Year end 31 December |
US GAAP |
US GAAP |
US GAAP |
US GAAP |
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PROFIT & LOSS |
||||||
Revenue |
|
|
590,448 |
244,301 |
264,152 |
122,236 |
Cost of Sales |
0 |
(4,065) |
(12,717) |
(9,580) |
||
Gross Profit |
590,448 |
240,236 |
251,435 |
112,656 |
||
General & Administrative |
(36,090) |
(43,287) |
(60,014) |
(60,792) |
||
EBITDA |
|
|
550,379 |
193,129 |
176,812 |
37,255 |
Operating Profit (before amort. and except.) |
550,379 |
193,129 |
176,812 |
37,255 |
||
Intangible Amortization |
0 |
(12,028) |
(24,191) |
(24,191) |
||
Other |
(3,979) |
0 |
0 |
0 |
||
Exceptionals |
0 |
(51,699) |
(2,649) |
0 |
||
Operating Profit |
550,379 |
129,402 |
149,972 |
13,064 |
||
Net Interest |
(26,691) |
(17,679) |
(18,959) |
(17,323) |
||
Other |
6,450 |
(2,353) |
6,271 |
0 |
||
Profit Before Tax (norm) |
|
|
530,138 |
175,450 |
157,853 |
19,932 |
Profit Before Tax (FRS 3) |
|
|
530,138 |
109,370 |
137,284 |
(4,259) |
Tax |
(197,343) |
(45,711) |
(64,208) |
1,746 |
||
Deferred tax |
(0) |
(0) |
(0) |
(0) |
||
Profit After Tax (norm) |
332,795 |
129,739 |
93,645 |
21,678 |
||
Profit After Tax (FRS 3) |
332,795 |
63,659 |
73,076 |
(2,513) |
||
Minority interest |
0 |
(53) |
(47) |
(47) |
||
Profit After Tax less Minority Interest (FRS 3) |
332,795 |
63,606 |
73,029 |
(2,560) |
||
Average Number of Shares Outstanding (m) |
163.4 |
163.8 |
157.8 |
159.3 |
||
EPS - normalized ($) |
|
|
2.04 |
0.78 |
0.59 |
0.14 |
EPS - FRS 3 ($) |
|
|
2.04 |
0.39 |
0.46 |
(0.02) |
Dividend per share ($) |
0.60 |
0.10 |
0.0 |
0.0 |
||
Gross Margin (%) |
100.0 |
98.3 |
95.2 |
92.2 |
||
EBITDA Margin (%) |
93.2 |
79.1 |
66.9 |
30.5 |
||
Operating Margin (before GW and except.) (%) |
93.2 |
79.1 |
66.9 |
30.5 |
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BALANCE SHEET |
||||||
Fixed Assets |
|
|
733,468 |
818,949 |
738,292 |
667,873 |
Intangible Assets |
0 |
228,542 |
216,321 |
192,130 |
||
Tangible Assets |
31 |
1,631 |
20,462 |
13,100 |
||
Royalty rights |
399,204 |
402,318 |
316,666 |
277,799 |
||
Other |
334,233 |
186,458 |
184,843 |
184,843 |
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Current Assets |
|
|
279,731 |
395,147 |
502,627 |
440,252 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
0 |
40,120 |
20,799 |
20,799 |
||
Cash |
218,883 |
147,154 |
401,696 |
339,321 |
||
Other |
60,848 |
207,873 |
80,132 |
80,132 |
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Current Liabilities |
|
|
(36,662) |
(130,315) |
(189,894) |
(63,494) |
Creditors |
(394) |
(7,016) |
(10,385) |
(10,385) |
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Short term borrowings |
(24,966) |
0 |
(126,400) |
0 |
||
Other |
(11,302) |
(123,299) |
(53,109) |
(53,109) |
||
Long Term Liabilities |
|
|
(283,485) |
(329,649) |
(208,894) |
(208,894) |
Long term borrowings |
(232,835) |
(232,443) |
(116,052) |
(116,052) |
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Other long term liabilities |
(50,650) |
(97,206) |
(92,842) |
(92,842) |
||
Net Assets |
|
|
693,052 |
754,132 |
842,131 |
835,737 |
Minority Interests |
0 |
0 |
0 |
0 |
||
Shareholder equity |
|
|
693,052 |
754,132 |
842,131 |
835,737 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
301,465 |
101,718 |
60,295 |
(12,524) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(9) |
(109,963) |
(705) |
(1,222) |
||
Acquisitions/disposals |
(71,593) |
13,082 |
208,815 |
77,734 |
||
Financing |
0 |
0 |
0 |
0 |
||
Dividends |
(98,307) |
(16,583) |
(21) |
0 |
||
Other |
(8,046) |
(47,629) |
(13,843) |
86 |
||
Net Cash Flow |
123,510 |
(59,375) |
254,541 |
64,073 |
||
Opening net debt/(cash) |
|
|
160,347 |
38,918 |
85,289 |
(159,244) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Exchange rate movements |
0 |
0 |
0 |
0 |
||
Other |
(2,081) |
13,004 |
(10,009) |
(47) |
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Closing net debt/(cash) |
|
|
38,918 |
85,289 |
(159,244) |
(223,269) |
Source: Edison Investment Research, PDL BioPharma accounts
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