Investing in Evofem

PDL BioPharma 16 April 2019 Update
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PDL BioPharma

Investing in Evofem

Financial update

Pharma & biotech

16 April 2019

Price

US$3.81

Market cap

US$488m

Net cash ($m) at 31 December 2018

244.6

Shares in issue

128.1m

Free float

91.9%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.0

20.3

26.7

Rel (local)

4.0

8.0

15.8

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. PDL is seeking additional commercial-stage pharmaceutical assets with multiple-year revenue growth potential, as well as late clinical-stage pharmaceutical products.

Next events

China Rasilez launch

H119

Evofem NDA filing

H219

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 announced that it will invest a total of up to $60m in two tranches of $30m each in Evofem, a women’s health company that is preparing to submit an NDA for Amphora, a non-hormonal female contraceptive, in H219 with a launch expected in 2020. In December, Evofem announced that it achieved the primary endpoint in the 1,400-patient AMPOWER trial with a seven-cycle cumulative pregnancy probability of 14% with the upper limit of the confidence interval at 18%. The pre-specified hurdle in the trial, as agreed to by the FDA, was a seven-cycle pregnancy rate of 16.5% with an upper limit of the confidence interval at 21%.

Year
end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

320.1

200.3

0.81

0.00

4.7

N/A

12/18

198.1

78.8

0.45

0.00

8.5

N/A

12/19e

122.5

58.7

0.38

0.00

10.0

N/A

12/20e

124.5

59.8

0.37

0.00

10.3

N/A

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

A non-hormonal method of contraception

Amphora 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. 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 (semen is alkaline with a pH over 7). Acidity is also not ideal for certain viral and bacterial pathogens.

Targeting an extremely large market

According to the Centers for Disease Control and Prevention (CDC), 61.7% of the 60.9 million women aged 15–44 use contraception. Almost half of those use either short- or long-acting hormonal oral contraceptive pills or devices such as a ring or a patch. According to Evaluate Pharma, $6.5bn worth of hormonal contraceptives were sold in 2018.

Positive data indicative of efficacy

Two large Phase III trials have been conducted with Amphora. In 2014, the company reported that the 3,389-patient AMP001 trial met the primary endpoint of non-inferiority to Conceptrol, a spermicidal gel. The FDA issued a complete response letter in 2016 as it questioned some of the data from Russia (20% of the trial participants) so the company initiated the 1,400-patient confirmatory AMPOWER trial, which recently met its primary endpoint.

Valuation: $816m or $6.37 per share

We have increased our valuation to $816m or $6.37 per basic share, from $757m or $5.91 per share. The increase is due to adding the value of the Evofem investment, net of the $30m cash from the first tranche. We estimate that Amphora will be able to achieve $521m in peak sales with patent protection out to 2033.

Investing in women’s health

PDL has announced that it entered into a securities purchase agreement with Evofem, a Nasdaq-listed women’s health company that is developing a non-hormonal contraceptive product. PDL will invest up to $60m in two tranches of $30m each, the first being invested immediately and the second being invested by 10 June 2019. Both tranches will have the same terms, a purchase price of $4.50 per share (a 26% premium to the closing price of Evofem the day before the investment was announced) for 6,666,667 shares with 1,666,667 warrants with an exercise price of $6.38 per share. Additionally, Woodford, which owns 9.6m shares (~34% of the company pre-PDL deal) of the company, and Invesco, which owns 9.2m shares (~33% of the company pre-PDL deal), have an opportunity to invest up to $10m each at the same terms as PDL. Following the investment of the first tranche, PDL owns approximately 19% of the company and will own 29% of Evofem assuming it, Woodford and Invesco all exercise their rights to invest in the second tranche. The company had previously indicated that it was looking at pre-commercial opportunities and this fits in well with that. The structure is especially appealing as it does provide the promise of substantial returns but with downside capped at either $30m or $60m if Evofem does not live up to expectations.

The Evofem opportunity

Evofem is developing Amphora as a contraceptive. 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.

The addressable market is quite large. 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 1: 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 2). While generics exist, brand is important in this market.

Exhibit 2: 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

However, despite the popularity of hormonal contraceptives, they are associated with some potential severe side effects. The risk of venous thromboembolism increases three to six times, while the risks of heart attack or stroke go up two to three times1. Also, certain women are contraindicated from receiving hormonal therapy, including smokers over the age of 35 and women with a history of breast or pelvic cancers. Hence a safe and effective alternative to hormones would likely find a market, likely a mix of some switching over from hormonal therapy and those who are currently not using contraception.

  Gorenoi et al, Benefits and risks of hormonal contraception in women. German Medical Science Health Technology Assessment 2007, Vol. 3

Amphora’s efficacy was demonstrated in two large Phase III trials. In 2014, the company reported that the 3,389 patient AMP001 trial met the primary endpoint of non-inferiority to Conceptrol, a spermicidal gel. In the modified intent to treat analysis, the cumulative pregnancy percentage was 10.5% in the Amphora arm and 10.0% in the Conceptrol arm. For the “perfect use” population (defined as those who used their assigned product for every sexual episode), the pregnancy percentage was 4.1% in the Amphora arm compared to 4.2% with Conceptrol. Importantly, Amphora demonstrated a benign safety profile with fewer than 2% of women withdrawing due to an adverse event, a slightly lower rate than with Conceptrol.

However, the FDA had some issues with the data, namely from the 20% of study participants in Russia, which the agency viewed as “not generalizable” to the US population and requested a confirmatory trial. Following feedback from the FDA, the company initiated the 1,400-patient confirmatory AMPOWER trial, which would be conducted exclusively in the United States with a pre-specified hurdle of a seven-cycle pregnancy rate of 16.5% with an upper limit of the confidence interval at 21%. In December 2018, Evofem announced the results of the AMPOWER trial and that it met the primary endpoint with a seven-cycle cumulative pregnancy probability of 14% with the upper limit of the confidence interval at 18%. In women who used Amphora perfectly (per patient reporting), the cumulative pregnancy rate was only 1.3%. Once again, the adverse event profile was clean with fewer than 2% withdrawing due to an adverse event.

Evofem is currently expected to re-file on this data in H219, which, assuming a six-month review (as it is not this product’s first cycle before the FDA), means approval in H120. The company plans to launch with 100 salespeople, which would allow it to target the top 30% of contraception prescribing physicians (the vast majority of whom are gynaecologists). According to market research conducted by the company, its expectation are for a warm reception with Amphora potentially becoming the second most popular birth control method (see Exhibit 3). We view this as a bit aggressive as surveys often overshoot reality and people historically are reluctant to change practices, but Amphora’s market reach does not need to be this large for the PDL investment to be successful.

Exhibit 3: Survey results of 1,024 healthcare practitioners on anticipated market share post-Amphora approval

Method

Share post-Amphora approval

Relative change

Oral contraceptives (28-day)

26%

-14%

Amphora

15%

N/A

Hormonal IUD

11%

-10%

Condom

8%

-20%

Injectables

7%

-15%

Oral contraceptives (extended)

7%

-15%

None

5%

-19%

Implant

5%

-12%

Non-hormonal IUD

4%

-11%

Vaginal ring

4%

-14%

Fertility awareness

3%

-19%

Patch

3%

-18%

Emergency contraception

1%

-20%

Diaphragm/spermicide/cervical cap/sponge

1%

-16%

Other

0%

-13%

Source: Evofem

With regards to price, Evofem expects to price Amphora at $100–200 per month, which will likely not pose too much of a problem in getting insurance coverage. Also, as a reminder, minimum coverage requirements dictated by the Affordable Care Act (ACA) require most private healthcare plans to cover at least one form of each of the 18 FDA-approved contraceptive methods for women at no cost to the covered individual. So there is a bit of a political/regulatory tailwind that should assist Evofem in getting coverage.

Valuation

We have increased our valuation from $757m or $5.91 per basic share to $816m or $6.37 per share. The increase is due to adding the value of the Evofem investment, net of the $30m cash from the first tranche, which gives PDL a 19% position in the company. To value Evofem, we used a risk-adjusted NPV model and a 12.5% discount rate. Although both the Phase III trials were positive, we attribute a 70% chance of success to the product, slightly below our standard 80–90% in these situations. The reasons for the discount are that the FDA had previously had issues with the data from the first Phase III trial and this is not a huge unmet medical need.

We assume a price per patient of $150 per month with peak sales reaching up to $521m at expected patent expiration in 2033. With regards to the intellectual property position, there are currently granted patents that cover Amphora that expire in 2021, though the company believes these can be extended to at least 2024 through a Hatch-Waxman patent extension. In addition, Evofem also has the rights to several patent application families that would protect the product through 2033, if granted. There is also the question of how a generic would be approved as it is unclear how to demonstrate bioequivalence to a product like Amphora. It is possible that no generic is currently possible and a competitor would need to run clinical studies with their own version once patents expire (though the studies may be smaller than those run by Evofem). Without a substitutable generic and given current contraceptives have been able to maintain meaningful sales even with generics, modelling to 2033 may prove conservative.

We expect to update our valuation further once the second tranche is finalized and following regulatory updates from Evofem.

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

$264.4

$271.1

VB

Royalty on Spine Implant

Undisclosed

$14.1

$14.7

University of Michigan

Royalty on Cerdelga

2022

$25.6

$12.8

Wellstat

Note (Impaired)

Unknown

$50.2

$50.2

Hyperion

Note (impaired)

Unknown

$1.2

$1.2

Lensar

Equity

N/A

$56.2

AcelRx

Royalty on Zalviso

2027

$70.4

$73.7

CareView

Note (impaired)

2022

$11.5

$11.5

Noden

Equity

N/A

$37.6

$19.9

Kybella

Royalty

Unknown

$2.7

$0.8

Evofem

Equity

N/A

N/A

$89.0

Total

 

 

 

$601

Net cash (Q418 less Evofem investment) ($m)

$214.6

Total firm value ($m)

$816

Total basic shares (m)

128.1

Value per basic share ($)

$6.37

Total options (m)

1.4

Total number of shares (m)

129.5

Diluted value per share ($)

$6.30

Source: Edison Investment Research

Financials

The company ended Q418 with $394.6m in cash ($244.6m in net cash) so even with a full investment of the two tranches into Evofem, PDL will have a substantial amount of cash to execute on its business plans, which may include additional investments.

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

122,504

124,544

Cost of Sales

(30,537)

(48,460)

(29,060)

(29,348)

Gross Profit

289,523

149,650

93,445

95,197

General & Administrative

(63,324)

(62,559)

(35,164)

(36,571)

EBITDA

 

 

218,818

84,136

55,326

55,671

Operating Profit (before amort. and except.)

 

 

218,818

84,136

55,326

55,671

Intangible Amortisation

(24,689)

(15,831)

(15,831)

(15,831)

Other

0

0

0

0

Exceptionals

(349)

(118,899)

0

0

Operating Profit

193,780

(50,594)

39,495

39,840

Net Interest

(18,562)

(5,328)

3,387

4,138

Other

9,309

0

0

0

Profit Before Tax (norm)

 

 

200,256

78,808

58,713

59,809

Profit Before Tax (FRS 3)

 

 

184,527

(55,922)

42,882

43,978

Tax

(73,826)

(12,937)

(9,005)

(9,235)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

126,430

65,871

49,707

50,574

Profit After Tax (FRS 3)

110,701

(68,859)

33,876

34,743

Minority interest

(47)

0

0

0

Profit After Tax less Minority Interest (FRS 3)

110,654

(68,859)

33,876

34,743

Average Number of Shares Outstanding (m)

155.4

145.7

129.9

135.1

EPS - normalised ($)

 

 

0.81

0.45

0.38

0.37

EPS - FRS 3 ($)

 

 

0.71

(0.47)

0.26

0.26

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

90.5

75.5

76.3

76.4

EBITDA Margin (%)

68.4

42.5

45.2

44.7

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

68.4

42.5

45.2

44.7

BALANCE SHEET

Fixed Assets

 

 

602,680

446,519

370,011

320,082

Intangible Assets

215,823

51,319

51,319

51,319

Tangible Assets

7,222

7,387

8,612

9,857

Royalty rights

349,223

376,510

271,087

219,912

Other

30,412

11,303

38,993

38,993

Current Assets

 

 

640,443

517,217

600,202

715,296

Stocks

0

0

0

0

Debtors

31,183

21,648

21,648

21,648

Cash

527,266

394,590

477,575

592,669

Other

81,994

100,979

100,979

100,979

Current Liabilities

 

 

(193,109)

(52,470)

(52,470)

(52,454)

Creditors

(19,785)

(13,142)

(13,142)

(13,142)

Short term borrowings

(126,066)

0

0

0

Other

(47,258)

(39,328)

(39,328)

(39,312)

Long Term Liabilities

 

 

(204,124)

(181,487)

(181,487)

(181,487)

Long term borrowings

(117,415)

(124,644)

(124,644)

(124,644)

Other long term liabilities

(86,709)

(56,843)

(56,843)

(56,843)

Net Assets

 

 

845,890

729,779

736,257

801,437

Minority Interests

0

0

0

0

Shareholder equity

 

 

845,890

729,779

736,257

801,437

CASH FLOW

Operating Cash Flow

 

 

40,624

(13,425)

14,500

13,990

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(1,297)

(4,523)

(1,225)

(1,245)

Acquisitions/disposals

128,415

57,969

99,710

102,350

Financing

0

0

0

0

Dividends

(222)

(48)

0

0

Other

212,592

(46,202)

(30,000)

0

Net Cash Flow

380,112

(6,229)

82,985

115,094

Opening net debt/(cash)

 

 

85,289

(283,785)

(269,946)

(352,931)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

(11,038)

(7,610)

0

0

Closing net debt/(cash)

 

 

(283,785)

(269,946)

(352,931)

(468,025)

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 Edison analyst 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.

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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.

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Australia

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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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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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