headache-1540220

Glumetza generics take toll

PDL BioPharma 12 May 2016 Update

PDL BioPharma

Glumetza generics take toll

Earnings update

Pharma & biotech

12 May 2016

Price

US$3.17

Market cap

US$523m

Net cash ($m) at end Q116

59.8

Shares in issue

165.1m

Free float

92%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.4)

10.1

(52.5)

Rel (local)

(6.4)

(2.5)

(51.5)

52-week high/low

US$6.8

US$2.8

Business description

PDL BioPharma has reinvented itself through a two-pronged strategy of investing in royalty streams of marketed and development-stage therapeutics, and providing high-yield debt financing to medical device and diagnostic companies with near-term product launches.

Next event

Earnings

Q216

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 announced that it has taken a $48m write-down on the fair value of its Depomed royalty assets during Q116. The reason for the write-down was the faster than expected loss of market share for Glumetza and increase in pricing pressure from generic entry. The quarter also marks the last significant payment from the Queen et al royalty streams, amounting to $121m in revenue, but the concurrent timing of the payment and the write-down produced a tax benefit that offset the loss in Glumetza sales.

Year end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

581.2

501.3

2.04

0.61

1.6

19.2

12/15

590.4

530.1

2.04

0.60

1.6

18.9

12/16e

154.5

97.5

0.37

0.20

8.6

6.3

12/17e

69.4

9.3

0.04

0.20

79.3

6.3

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

Tax benefit from write-down offsets loss of sales

The non-cash charge of $48m associated with the change in fair value of PDL’s Depomed royalty assets resulted in $27m negative revenue for the company’s royalty assets. This offset a substantial portion of the Queen et al royalty revenue and resulted in what we model as $13m in tax benefits for the quarter.

Net cash positive and on track to meet obligations

The company ended Q116 with a positive net cash balance of $59.8m, the first time since 2012. We believe the company is well positioned to be able to service its $246m in convertible debt and $157m in predicted dividend, interest and contractual obligations before the debt is due in Q118.

$26m in non-Queen cash revenue

Despite the declining sales of Glumetza, PDL reported $17m in cash flow from the Depomed and other royalty streams. This is combined with the $9m in interest received for the company’s debt financings. PDL is scheduled to begin receiving principal repayments on its debt offerings starting in late 2016, which should continue to bolster cash flow.

Valuation: Increased to $1,036m

We are raising our valuation slightly to $1,036m ($6.28 per basic share), from $1,033m ($6.29 per basic share). We have reduced the valuation of the Depomed royalties by $13.6m, which is lower than the company’s $48m write-down because our initial models were more conservative. This was largely offset by the realization of the previously discounted Queen et al royalties, which was further enhanced by the tax benefit of the write-down. The company ended the quarter with $292m in cash and equivalents.

Quarterly update

Write-down due to Glumetza patent cliff

On the Q116 earnings conference call, PDL announced that sales of Glumetza were declining much more quickly than expected in response to the launch of the first generic formulation of the drug. Glumetza is a significant component of the company's so-called Depomed royalties and was originally licensed by Santarus from Depomed, but the drug is currently marketed by Valeant Pharmaceuticals. The adjustment to new sales models reported this past quarter resulted in a $48m write-down on the value of the Depomed assets (to $143.9m from $191.9m). The company cited a steeper than predicted decline in volume, as well as increased payer rebates as the reason for the discrepancy. Despite these adjustments, the company stated that the majority of the $17m in royalty revenue for the quarter was due to Glumetza, indicating that further declines in cash royalty streams may be expected before the market reaches equilibrium. We have also calculated that the write-down resulted in approximately $13m in tax benefits for the quarter, which largely offsets our predicted loss of sales for the quarter.

End of the Queen et al royalties

Q116 also marked the last major instalment of the Queen et al patent payments amounting to $121m. The royalty deal covering the technology used to generate humanized antibodies produced royalty streams from some of the most prominent antibody-based therapeutics ever produced (Avastin, Herceptin, Lucentis, Xolair, Tysabri, etc). The majority of the royalty stream was on products sold before the end of 2015. However, the agreement surrounding royalties on Tysabri (Biogen) is on drugs manufactured before the end of 2014, and therefore there may be some residual Queen et al revenue in the coming quarters as the stock of the drug is drawn down. Previous royalties from Tysabri were in the range of $13-15m per quarter, which we can see as the maximum potential revenue if there is more than one quarter’s worth of stock, although at this time we have very little insight into how much, if any, future revenue to expect.

Lilly changes endpoints for Solanezumab study

In March 2016, Lilly changed the endpoints for its ongoing EXPEDITION 3 Phase III clinical trial for the Alzheimer’s drug Solanezumab. The trial was originally designed to measure both cognitive function (ADAS-Cog 14 metric) and a functional assessment of the ability of patients to perform daily tasks (ADCS-ADL). However, in March 2016 the company announced that it would remove the functional assessment as an endpoint for the trial. Lilly cited recent research that cognitive decline typically precedes functional impairment, although the two effects are correlated.1 This adjustment to the trial protocol is one of a number of improvements Lilly has made to the trial over previous studies. The previous Phase III EXPEDITION 2 study achieved statistically significant improvements in ADAS-Cog 14 scores in patients with mild Alzheimer’s disease and the EXPEDITION 3 study was structured to focus on this mild disease subgroup. Additionally, patients in the EXPEDITION 3 trial will be confirmed to have Amyloid β deposits, unlike in earlier trials. We believe that the latest adjustment in the trial is reasonable, and we remain optimistic about results expected in late 2016. PDL would be entitled to 2% of sales if the drug receives approval.

  Zadhone L., et al (2013) Cognitive Declines Precede and Predict Functional Declines in Aging and Alzheimer's Disease. PLOS One. 8, e73645.

PDL and Ariad amend royalty agreement

In May 2016, Ariad entered into an agreement to transfer its European operations to Incyte Corporation. The deal includes the transfer of Ariad’s European office of 125 employees and the European marketing rights for Iclusig to Incyte in exchange for $140m in upfront payments and tiered royalties between 32-50% on net sales. Ariad will also be eligible for $135m in development milestones if Iclusig is approved for additional indications, and Incyte will provide $7m in development cost sharing for each of 2016 and 2017. In response to this, Ariad and PDL amended their royalty agreement to adjust the amount of additional funding available to Ariad. The original agreement entitled Ariad to $50m in funding in Q316 (in addition to $50m delivered in July 2015), with the option to draw an additional $100m any time between January and July 2016. The new agreement reduces the amount of cash payable under the option to $40m, but extends the period in which Ariad has to take the option to July 2017.

Detailed results and outlook

PDL reported revenue of $103m for the quarter ending 31 March 2016 compared to our estimates of $144m. The discrepancy is because of a non-cash $48m write-down associated with the valuation of the Depomed royalty assets due to declining sales of Glumetza. We currently predict earnings for the year of $62m compared to previous estimates of $97m. Cash royalty revenue for the quarter was $17m, compared to our estimates of $21m, due to declines in Glumetza royalties. The company reported $9m in interest revenue for the quarter, which is below our estimates of $10m because PDL reached an agreement with DirectFlow medical not to accrue interest until September 2016 after DirectFlow has completed a financing.

Revenue for the Queen et al patents was slightly lower than our predictions ($121m vs $123m), although this difference may be reduced in future quarters with inventory drawdowns of Tysabri. We have adjusted revenue expectations from debt agreements in 2016 (to $38m from $41m), based largely on the ongoing impairment of DirectFlow debt and the interest forbearance agreement through September 2016.

Operational spending for the quarter was largely in line with our expectations ($9.8m vs $9.5m) and we have not adjusted our expectations for the year ($39m). Earnings for the quarter were $56m and we expect earnings of $58m for the year.

The company ended Q116 with net cash of $59.8m. The Glumetza write-down had an estimated tax benefit of $13m, which substantially offsets cash flow losses due to lower sales. We currently predict a net cash flow of $88m for 2016 compared to previous estimates of $94m. Effects on cash flows beyond 2016 are minimal and we still expect that PDL will be able to meet all its financial obligations (Exhibit 1).

Exhibit 1: PDL obligations

Obligation

Time frame

Cost ($m)

Dividends

2016-17

68

Ariad payment*

Q316

50

CareView payment (assuming milestones and other conditions met)

Q217

20

Interest on convertible debt

2016-17

19

Outstanding convertible debt

Q118

246

Total

403

Source: PDL BioPharma filings, Note: *Ariad has the option for $40m in additional funding before Q317

Valuation

We are raising our valuation slightly to $1,036m ($6.28 per basic share) from $1,033m ($6.29 per basic share). The reduction in value of the Depomed assets was offset by the realization of the previously discounted Queen et al payment, which was further enhanced by the tax benefit of the write-down. In response to sales of Glumetza, we have reduced our valuation of the Depomed royalties by $13.6m. This reduction is less than the $48m write-down taken by the company because our estimates for 2016 sales were substantially more conservative than the company’s. The remaining portion of the value of this asset attributable to Glumetza is approximately $10m. We have reduced the valuation of the DirectFlow notes by $2m to reflect the interest forbearance until September 2016. We also currently model the Queen et al royalties as fully realized. Our other valuations remain unchanged. We expect to update our valuations with developing news regarding the Wellstat litigation and the relaunch of Auvi-Q by Kaleo.

Exhibit 2: Valuation of PDL

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

$143.9

$209.9

VB

Royalty on Spine Implant

Undisclosed

$17.3

$24.5

University of Michigan

Royalty on Cerdelga

2022

$71.6

$35.5

Lilly

Royalty on solanezumab

2030

N/A

$161.4

DirectFlow

Note (Impaired)

2018

$56.9

$47.7

Wellstat

Note (Impaired)

Unknown

$50.2

$50.2

Hyperion

Note (Impaired)

Unknown

$1.2

$1.2

Avinger

Royalty

2018

$2.3

$3.7

Lensar

Note

2018

$43.9

$56.8

Paradigm Spine

Note

2019

$54.2

$55.2

Kaleo

Note

2029

$146.8

$154.8

Acelrx

Royalty on Zalviso

2027

$69.6

$67.5

Ariad

Royalty on Iclusig

2033

$50.2

$87.1

Careview

Note

2022

$18.7

$20.7

Total

 

 

 

$976

Net cash (Q116) ($m)

$59.8

Total firm value ($m)

$1,036

Total basic shares (m)

165.1

Value per basic share ($)

$6.28

Total options

0.1

Total number of shares

165.2

Diluted value per share ($)

$6.27

Source: Edison Investment Research, PDL BioPharma reports

Exhibit 3: Financial summary

2014

2015

2016e

2017e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

581,225

590,448

154,537

69,412

Cost of Sales

0

0

0

0

Gross Profit

581,225

590,448

154,537

69,412

General & Administrative

(34,914)

(36,090)

(38,977)

(42,095)

EBITDA

 

 

546,311

550,379

115,559

27,317

Operating Profit (before GW and except.)

 

546,311

550,379

115,559

27,317

Intangible Amortization

0

0

0

0

Other

0

(3,979)

0

0

Exceptionals

0

0

0

0

Operating Profit

546,311

550,379

115,559

27,317

Net Interest

(38,896)

(26,691)

(18,080)

(18,040)

Other

(6,143)

6,450

0

0

Profit Before Tax (norm)

 

 

501,272

530,138

97,479

9,277

Profit Before Tax (FRS 3)

 

 

501,272

530,138

97,479

9,277

Tax

(179,028)

(197,343)

(35,977)

(3,247)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

322,244

332,795

61,502

6,030

Profit After Tax (FRS 3)

322,244

332,795

61,502

6,030

Average Number of Shares Outstanding (m)

158.2

163.4

164.2

167.5

EPS - normalized (c)

 

 

203.66

203.69

37.46

3.60

EPS - FRS 3 (c)

 

 

203.66

203.69

37.46

3.60

Dividend per share (c)

61.1

60.2

20.0

20.0

Gross Margin (%)

100.0

100.0

100.0

100.0

EBITDA Margin (%)

94.0

93.2

74.8

39.4

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

94.0

93.2

74.8

39.4

BALANCE SHEET

Fixed Assets

 

 

606,453

733,468

706,359

652,926

Intangible Assets

0

0

0

0

Tangible Assets

62

31

19

7

Royalty rights

259,244

399,204

383,125

346,521

Other

347,147

334,233

323,216

306,398

Current Assets

 

 

355,897

279,731

341,155

383,234

Stocks

0

0

0

0

Debtors

300

0

0

0

Cash

291,377

218,883

277,234

324,428

Other

64,220

60,848

63,921

58,806

Current Liabilities

 

 

(187,983)

(36,662)

(12,012)

(266,327)

Creditors

(318)

(394)

(1,466)

(1,466)

Short term borrowings

(175,496)

(24,966)

0

(254,315)

Other

(12,169)

(11,302)

(10,546)

(10,546)

Long Term Liabilities

 

 

(313,930)

(283,485)

(294,901)

(53,549)

Long term borrowings

(276,228)

(232,835)

(241,352)

0

Other long term liabilities

(37,702)

(50,650)

(53,549)

(53,549)

Net Assets

 

 

460,437

693,052

740,601

716,284

CASH FLOW

Operating Cash Flow

 

 

292,281

301,465

88,250

(54,498)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(49)

(9)

(24)

(24)

Acquisitions/disposals

21,360

(71,593)

10,735

73,207

Financing

0

0

0

0

Dividends

(96,557)

(98,307)

(32,883)

(33,491)

Other

(159,420)

(8,046)

17,273

62,000

Net Cash Flow

57,615

123,510

83,351

47,194

Opening net debt/(cash)

 

 

300,978

160,347

38,918

(35,882)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

83,016

(2,081)

(8,551)

(12,963)

Closing net debt/(cash)

 

 

160,347

38,918

(35,882)

(70,113)

Source: Company accounts, Edison Investment Research

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