headache-1540220

Depomed paying off

PDL BioPharma 10 August 2017 Update
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PDL BioPharma

Depomed paying off

Financial update

Pharma & biotech

10 August 2017

Price

US$2.64

Market cap

US$407m

Net cash ($m) at 30 June 2017

122.5

Shares in issue

154.1m

Free float

90.1%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.9

16.3

(12.0)

Rel (local)

8.7

12.7

(22.4)

52-week high/low

US$3.7

US$2.0

Business description

PDL BioPharma is reinventing itself as a healthcare-focused finance company through a three-pronged strategy: investing in royalty streams; providing high-yield financing to life science companies with near-term product launches; and purchasing approved drugs to be sold by Noden Pharma.

Next events

Acquire additional products for Noden platform

2017/18

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

PDL BioPharma is a research client of Edison Investment Research Limited

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
end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

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
carrying value ($m)

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

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

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

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

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

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

Current Liabilities

 

 

(36,662)

(130,315)

(189,894)

(63,494)

Creditors

(394)

(7,016)

(10,385)

(10,385)

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)

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)

Closing net debt/(cash)

 

 

38,918

85,289

(159,244)

(223,269)

Source: Edison Investment Research, PDL BioPharma accounts

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by PDL BioPharma and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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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Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by PDL BioPharma and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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