headache-1540220

Eyes focused on Evofem

PDL BioPharma 15 August 2019 Update
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PDL BioPharma

Eyes focused on Evofem

Financial update

Pharma & biotech

15 August 2019

Price

US$2.62

Market cap

US$299m

Net cash ($m) at 30 June 2019

134.9

Shares in issue

114.2m

Free float

90.0%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(16.3)

(16.6)

10.1

Rel (local)

(11.2)

(16.7)

10.1

52-week high/low

US$3.85

US$2.28

Business description

PDL BioPharma currently has a collection of healthcare-related royalty and note assets as well as Tekturna/Rasilez for hypertension and an equity stake in Evofem. PDL is seeking additional commercial-stage pharmaceutical assets with multiple-year revenue growth potential, as well as late clinical-stage pharmaceutical products.

Next events

Evofem NDA filing

Q419

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

PDL BioPharma is a research client of Edison Investment Research Limited

In June, PDL invested the second and final tranche of $30m ($60m in total) in Evofem, a women’s health company that is preparing to submit an NDA for Amphora, a non-hormonal female contraceptive, in Q419 with approval expected in H120. PDL now owns approximately 29% of the company. Evofem recently released exploratory data from its pivotal AMPOWER trial, which indicated that unlike other contraceptives, Amphora may increase sexual satisfaction, which could give it a marketing edge upon approval. The market opportunity is quite large, with $6.5bn worth of hormonal contraceptives being sold in 2018 according to EvaluatePharma.

Year
end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

320.1

200.3

0.81

0.00

3.2

N/A

12/18

198.1

78.8

0.45

0.00

5.8

N/A

12/19e

91.3

(15.9)

(0.19)

0.00

N/A

N/A

12/20e

123.6

11.6

0.08

0.00

32.8

N/A

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

Amphora’s potential advantages

Evofem’s Amphora, unlike much of the competition, is non-hormonal and therefore does not have the same long-term safety concerns. It works by maintaining the vaginal pH level in the 3.5–4.5 range, which is mildly acidic and inhospitable to sperm. Amphora also has lubricant properties and based upon data from the pivotal AMPOWER trial, helped improve the sexual satisfaction of almost 50% of women in the trial.

LENSAR growing strongly

The LENSAR femtosecond cataract laser business had product revenue of $7.4m in the quarter, up 26% compared to Q218 and up 10% sequentially. Importantly, procedure volume also grew by 28% compared to the previous year. According to PDL, one of the reasons for this growth is that the company is not as financially constrained now that LENSAR is part of a bigger, well-funded entity.

AcelRx royalty write-down

PDL had previously acquired the rights (mainly for the EU) to Zalviso, an approved drug/device combination product that dispenses a sublingual formulation of sufentanil, from AcelRx for $65m. After royalties were not tracking in line with forecasts, an analysis by a third party was conducted and PDL decided to take a $60m write-down on the product.

Valuation: $713m or $6.24 per share

We have decreased our valuation to $713m or $6.24 per basic share, from $789m or $6.54 per share, mainly due to lowering our valuation for the AcelRx royalties and a lower net cash level. This was mitigated by an increase in the value of the Evofem stake due to the higher investment, while the per-share PDL value was assisted by the stock buyback, which is now complete.

Amphora update

Following the investment of the second tranche of $30m, PDL now owns 29% of Evofem. As a reminder, Evofem is developing Amphora as a contraceptive, a large addressable 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. Amphora is bioadhesive vaginal gel that is a mix of L-lactic acid, citric acid and potassium bitartrate, all compounds that are considered to be generally regarded as safe (GRAS) by the FDA and are frequent ingredients in food. Amphora works by maintaining the vaginal pH level in the 3.5–4.5 range, which is mildly acidic and inhospitable to sperm, which requires a more neutral pH environment for optimum mobility. Typically, semen, with a pH of 7.2–8.0, helps to raise the pH of the vaginal environment to 6.0 or higher. Data indicate that Amphora is effective if applied up to 10 hours prior to intercourse.

In December 2018, Evofem announced the results of the AMPOWER trial. In that trial, Amphora met the primary endpoint with a seven-cycle cumulative pregnancy probability of 13.7% with the upper limit of the confidence interval at 17.4%. The company recently released additional data from the trial that indicated that Amphora, besides being an effective contraceptive, also appears to improve sexual satisfaction in almost 50% of participants (see Exhibit 1). At baseline, participants in the trial had been asked if their most recent contraceptive method had any impact on their sex life and only around 17% had indicated any improvement, indicating an opportunity for Amphora to provide a potential benefit. This data (though only exploratory and in an uncontrolled trial) plus Amphora’s lubricant qualities, may help provide it a marketing edge in a large, competitive market.

Exhibit 1: Exploratory Amphora sexual satisfaction endpoint data

Visit 3 (%)

Visit 4 (%)

Visit 5 (%)

A lot better than before

16.1

19.9

22.2

A little better than before

28.4

27.4

25

No different

51

47.9

46.4

A little worse than before

4.4

4.3

5.3

A lot worse than before

0.2

0.6

1.1

Source: Evofem. Note: Responses were to the question “What impact did the study contraception have on your sex life since the last study visit”.

Q2 results

PDL reported Q219 revenues of negative $22.5m due to a $60m write-down of the AcelRx royalties related to Zalviso. PDL had acquired the royalty rights to Zalviso, a drug/device combination product that dispenses a sublingual formulation of sufentanil, from AcelRx for $65m in September 2015. AcelRx had partnered with Grunenthal in the EU, Switzerland and Australia, and so PDL acquired the right to 75% of the royalties received from Grunenthal (AcelRx is eligible for mid-teen to mid-20% royalties) and 80% of the first four commercial milestones.

Zalviso was approved in the EU in 2015 to treat moderate to severe post-operative pain in the hospital setting for up to 72 hours and is meant to be used instead of intravenous patient-controlled analgesia. After royalties were not tracking in line with PDL’s forecasts in prior quarters, the company enlisted the help of a third party to conduct an analysis, which concluded that the target market (patient controlled analgesia) was smaller than initially thought, the high price is limiting switching from alternative therapies and as the device is prefilled for three days of use, its use in procedures with shorter recovery times is limited. Following the write-down, the carrying value for the AcelRx royalties is now $12.5m on the PDL balance sheet. Absent the impact of the AcelRx write-down, revenues associated with the royalty business would have been $19.6m, up 52% compared to Q218, almost exclusively due to cash royalties related to the Assertio assets.

Noden net revenue was $10.4m in the quarter, down 60% compared to Q218, mainly due to the launch of a third-party generic in the United States in March of this year as well as due to inventory stocking of the authorized generic in Q119. As the US is the more profitable segment, gross margins fell from 55% to 29% between the first and second quarters. Noden showed a slight operating loss of $345,000 in the quarter and the company is targeting returning to profitability. The company ceased all promotional efforts in Q219 and restructured the Noden US team, which will lead to lower expenses in H219.

Additionally, LENSAR had product revenue of $7.4m in the quarter, up 26% compared to Q218 and up 10% sequentially with most of the growth attributed to the Asian market. Importantly, procedure volume also grew by 28% compared to the previous year. The quarterly loss for LENSAR was $1.7m, slightly lower than the $1.9m loss in the same quarter last year. Gross margin fell from 44% in Q1 to 34% in Q2 due to product mix as systems have lower margins than consumables.

Valuation

We have decreased our valuation to $713m or $6.24 per basic share from $789m or $6.54 per share. Due to the company re-rating the value of the AcelRx royalties, we have lowered our NPV estimate for them from $73.7m to $10.8m as we reduced our peak sales estimate from around $188m to $23m. The other significant valuation change was the increase in the value of the Evofem asset from $89.0m to $133.1m due to the higher stake owned by PDL. We also lowered the value of LENSAR by $0.4m as the positive impact of increasing revenues was superseded by lower margins. Additionally, we have lowered Noden by $1.0m mainly due to lower margins. Net cash also fell due to the second tranche of the Evofem investment ($30m) and the cost of the share repurchase program during the quarter ($26m). Note that following the end of the quarter, the company repurchased 1.3m shares for a total of $4.1m, which concludes the share repurchase program in which 31m shares were repurchased for a total of $100m.

Exhibit 2: 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

$263.9

$271.1

VB

Royalty on Spine Implant

Undisclosed

$14.4

$14.7

University of Michigan

Royalty on Cerdelga

2022

$24.3

$12.8

Wellstat

Note (impaired)

Unknown

$50.2

$50.2

Hyperion

Note (impaired)

Unknown

$1.2

$1.2

Lensar

Equity

N/A

$61.2

AcelRx

Royalty on Zalviso

2027

$72.5

$10.8

Careview

Note (impaired)

2022

$11.5

$11.5

Noden

Equity

N/A

$34.8

$14.7

Kybella

Royalty

Unknown

$0.6

$0.7

Evofem

Equity

N/A

$88.5

$133.1

Total

 

 

 

$582

Net cash (Q219)* ($m)

$130.8

Total firm value ($m)

$713

Total basic shares (m)

114.2

Value per basic share ($)

$6.24

Total options (m)

0.0

Total number of shares (m)

114.2

Diluted value per share ($)

$6.24

Source: Edison Investment Research. Note: *Q219 net cash is adjusted for the subsequent share repurchase.

Financials

We have lowered our FY19 revenue estimate from $123.5m to $91.3m on account of the AcelRx write-down, which subtracted $60m from revenues. Otherwise, revenues are tracking higher than our initial estimates. Our FY20 revenue estimate is lower by $2.1m mainly due to the elimination of the bulk of expected AcelRx revenues, which were mitigated by higher LENSAR estimates. We have increased our COGS estimates by $17.3m for 2019 and $22.6m for 2020 as we are now assuming lower gross margins in the long term for both Noden and LENSAR. The company ended the quarter with $284.9m in cash ($134.9m in net cash).

Exhibit 3: 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

91,328

123,635

Cost of Sales

(30,537)

(48,460)

(48,881)

(52,407)

Gross Profit

289,523

149,650

42,447

71,229

General & Administrative

(63,324)

(62,559)

(49,724)

(51,713)

EBITDA

 

 

218,818

84,136

(10,804)

15,989

Operating Profit (before amort. and except.)

 

 

218,818

84,136

(10,804)

15,989

Intangible Amortisation

(24,689)

(15,831)

(6,366)

(6,366)

Other

0

0

0

0

Exceptionals

(349)

(118,899)

0

0

Operating Profit

193,780

(50,594)

(17,170)

9,623

Net Interest

(18,562)

(5,328)

(5,083)

(4,401)

Other

9,309

0

45,487

0

Profit Before Tax (norm)

 

 

200,256

78,808

(15,887)

11,588

Profit Before Tax (FRS 3)

 

 

184,527

(55,922)

23,234

5,222

Tax

(73,826)

(12,937)

(7,407)

(1,097)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

126,430

65,871

(23,294)

10,492

Profit After Tax (FRS 3)

110,701

(68,859)

15,827

4,126

Minority interest

(47)

0

0

0

Profit After Tax less Minority Interest (FRS 3)

110,654

(68,859)

15,827

4,126

Average Number of Shares Outstanding (m)

155.4

145.7

119.6

124.3

EPS - normalised ($)

 

 

0.81

0.45

(0.19)

0.08

EPS - FRS 3 ($)

 

 

0.71

(0.47)

0.13

0.03

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

90.5

75.5

46.5

57.6

EBITDA Margin (%)

68.4

42.5

-11.8

12.9

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

68.4

42.5

-11.8

12.9

BALANCE SHEET

Fixed Assets

 

 

602,680

446,519

431,028

387,822

Intangible Assets

215,823

51,319

50,449

50,449

Tangible Assets

7,222

7,387

7,156

8,392

Royalty rights

349,223

376,510

255,670

211,227

Other

30,412

11,303

117,753

117,753

Current Assets

 

 

640,443

517,217

422,846

496,043

Stocks

0

0

0

0

Debtors

31,183

21,648

17,872

17,872

Cash

527,266

394,590

308,084

381,281

Other

81,994

100,979

96,890

96,890

Current Liabilities

 

 

(193,109)

(52,470)

(45,704)

(45,679)

Creditors

(19,785)

(13,142)

(14,812)

(14,812)

Short term borrowings

(126,066)

0

0

0

Other

(47,258)

(39,328)

(30,892)

(30,867)

Long Term Liabilities

 

 

(204,124)

(181,487)

(186,701)

(186,701)

Long term borrowings

(117,415)

(124,644)

(128,520)

(128,520)

Other long term liabilities

(86,709)

(56,843)

(58,181)

(58,181)

Net Assets

 

 

845,890

729,779

621,469

651,485

Minority Interests

0

0

0

0

Shareholder equity

 

 

845,890

729,779

621,469

651,485

CASH FLOW

Operating Cash Flow

 

 

40,624

(13,425)

(21,508)

(14,452)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(1,297)

(4,523)

(2,105)

(1,236)

Acquisitions/disposals

128,415

57,969

73,543

88,885

Financing

0

0

0

0

Dividends

(222)

(48)

0

0

Other

212,592

(46,202)

(136,437)

0

Net Cash Flow

380,112

(6,229)

(86,507)

73,197

Opening net debt/(cash)

 

 

85,289

(283,785)

(269,946)

(179,564)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

(11,038)

(7,610)

(3,876)

0

Closing net debt/(cash)

 

 

(283,785)

(269,946)

(179,564)

(252,761)

Source: Edison Investment Research, PDL BioPharma reports


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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.

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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.

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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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United Kingdom

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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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