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Less dividend equals more deals

PDL BioPharma 11 August 2016 Update

PDL BioPharma

Less dividend equals more deals

Quarterly update

Pharma & biotech

11 August 2016

Price

US$2.96

Market cap

US$490m

Net debt ($m) as at 30 June 2016

11.1

Shares in issue

165.5m

Free float

96%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.8)

(8.9)

(49.8)

Rel (local)

(11.6)

(12.7)

(51.5)

52-week high/low

US$6.0

US$2.8

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 through the purchase of approved drugs to be sold by Noden Pharma.

Next events

Earnings

Q316

Tekturna SEC filing

September 2016

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 reported earnings for Q216 and announced that the company would be suspending dividend payments until further notice. This follows the reduction in dividends that occurred in Q116. Management made this decision strategically to reallocate resources to capitalize on the current hostile financing environment that has increased the attractiveness of alternative deals. It will also be able to take advantage of big pharma divestments using Noden Pharma as a platform for commercialization.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

581.2

501.3

2.04

0.61

1.5

20.6

12/15

590.4

530.1

2.04

0.60

1.5

20.3

12/16e

224.9

134.5

0.53

0.10

5.6

3.4

12/17e

197.9

72.5

0.32

0.00

9.3

N/A

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

Some residual Queen cash

PDL reported revenue of $21.0m for the quarter and $36.6m in incoming cash (offset by write-downs). $14.2m of this cash was due to residual revenue from the Queen et al. royalty stream. Unlike the other products covered under the agreement, the royalty relates to sales of Tysabri manufactured in 2014, and revenue is expected to continue as Biogen draws down this inventory.

Glumetza and Cerdelga take a hit

The company recorded write-downs on the fair value of its Depomed and University of Michigan royalties of $7.4m and $7.6m, respectively. The Depomed write-down was a result of a second quarter of lower than expected sales of Glumetza due to pricing pressure following generic entry earlier this year. The University of Michigan royalty was also reduced in value because reimbursement issues in Europe and Japan have delayed sales of Cerdelga in these regions.

PDL gets a piece of Kybella

In its most recent deal, PDL bought a small royalty stream (low single-digit) on the sales of Kybella, an injection for double chin developed by Kythera and bought by Allergan. We estimate peak sales of the drug in the range of $450m. The company paid $9.5m, which included a $1m sales milestone.

Valuation: $1,133m or $6.84 per basic share

We have increased our valuation to $1,133m or $6.84 per basic share, from $1,119m or $6.78, based on multiple positive and negative changes to the valuation. The value of the Depomed asset has increased (by $2.8m) due to approval of Jentadueto XR, partially offset by lower than expected Glumetza sales. The University of Michigan royalties have been reduced in value (by $5.8m) because the regulatory difficulties in Europe and Japan reduced our revenue projections for Cerdelga. We have included the Kybella royalty with an initial valuation of $12.7m based on an assumed royalty of 1%. Net debt has improved by $4.1m to $11.1m.

Quarterly update

PDL provided an update on operations and earnings for Q216 on 4 August 2016. Concurrent with the report, PDL announced that it was eliminating its dividend. The dividend was $0.05 in Q116 and Q216 and prior to this had been $0.15 per quarter. This development is not particularly surprising considering the reduction in cash flow from the Queen at al. patents. In addition, the current financial environment for pharma and biotech is particularly difficult through traditional avenues, and this should increase the attractiveness of alternative financing like that offered by PDL. The recent equity transaction with Noden Pharma will provide a new platform for investment, which is also attractive considering the large number of products expected to be divested from larger pharmaceutical companies. The company’s capital is likely more valuable being leveraged for additional deals rather than dividend payments, at least for the near term. We estimate that the elimination of the dividend, if continued, will release cash of over $80m through 2018, based on previous rates.

Still a bit of Queen et al. revenue

The company reported $14.2m in royalty revenue from the Queen et al. royalty stream. This revenue is based on the sales of Tysabri over Q116. 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. The Tysabri royalty for Q216 is similar to Q116, suggesting the same volume of product bearing the royalty was sold, and therefore this revenue stream will likely continue, at least to some degree, into Q3. We do not include this revenue in our forecasts and valuation due to lack of insight into these inventory levels.

Royalty write-downs

PDL reported revenue loss from royalty rights of $855k for the quarter, which reflects a write-down on the fair value of the rights of $15.5m offset by $14.7m in cash proceeds. The majority of the write-down can be attributed to a $7.6m change in the fair value of the University of Michigan royalties and a $7.4m change in the value of the Depomed royalties.

The University of Michigan royalties pay a small percentage (estimated at 2-3%) on the sales of Cerdelga, which is marketed by Sanofi for the treatment of Gaucher disease. The write-down is the result of a delay in pricing and reimbursement decisions in Europe and Japan, which constituted a significant portion of predicted revenues. Sanofi reported €49m in sales for the drug in the first half, an 88% increase over H115. Based on this growth rate and no expansion into new territories, we predict €124m ($138m) in sales for 2016. As a consequence, we have reduced our valuation for the University of Michigan royalty to $29.7m (from $35.5m).

The write-down for the Depomed royalty is due to lower than expected Glumetza sales. Unfortunately, Valeant (which markets the drug) does not release any details regarding sales or pricing of the product, but according to a third-party source, low sales were predominantly due to a decrease in the gross/net ratio because of pricing pressure associated with the recent launch of generic versions of the drug. This marks the second quarter in a row in which these assets have been reduced in value by the company, following the $48m write-down in Q1 citing other effects of the generic launch. However, our valuation for the Depomed royalty has increased to $211.7m (from $209.9m) because the recent approval of Jentadueto XR, which is also covered under the agreement, has offset adjustments to Glumetza sales, which were conservative on our part. This approval directly contributed $6m to the royalty cash proceeds for the quarter from the approval milestone.

Kybella royalty deal

PDL announced on the earnings call that it has initiated a new royalty agreement associated with Kybella, a treatment for double chin that was developed by Kythera and subsequently purchased by Allergan. The company purchased a royalty in the low single digits from an inventor of the therapy in return for $9.5m upfront and $1m in sales milestones. We currently model sales in the range of $450m for the drug before generic entry in 2028. With an assumed 1% royalty rate, this corresponds to an NPV of $12.7m, which is now included in our valuation.

Other developments

The company recently announced that as part of its agreement with ARIAD, the company provided the second tranche of $50m to ARIAD on 28 July 2016. Under the agreement, the royalty to PDL will increase to 5% (from 2.5%). These developments were previously accounted for in our valuation of the ARIAD deal and our financial projections.

PDL also provided an update of the Wellstat Diagnostics liquidation proceedings. The company had previously petitioned the supreme court of New York to provide a summary judgement against Wellstat for the $117.5m legally owed to the company. This motion was granted, and the company is now pursuing a writ of attachment that would hold Wellstat officers liable in the case that Wellstat’s assets are insufficient. Despite this, PDL maintains that Wellstat’s assets exceed the carrying value of the note ($50.2m).

Valuation

We have increased our valuation to $1,133m or $6.84 per basic share, from $1,119m or $6.78. This adjustment is based on a number of positive and negative factors. Our valuation of the Depomed royalty assets has increased from $209.9m to $211.7m despite the Glumetza write-down due to the offsetting effect of Jentadueto XR approval. University of Michigan royalty rights have been reduced to $29.7m from $35.5m, based on the Cerdelga regulatory issues in Europe and Japan. The value of the Direct Flow note has increased slightly to $48.1m from $47.7m because of $1.5m in additional financing issued to the company. We have added the Kybella royalty stream deal to the model with a value of $12.7m. Finally, the net debt position has improved to $11.1m from our $15.2m estimate at the closing of the Noden deal in July 2016 (note: we include both a $75m COD and the cost of the Noden transaction in this calculation). We expect to further update our valuation with the release of detailed Tekturna financials in September 2016, and following any additional transactions.

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

$136.6

$211.7

VB

Royalty on Spine Implant

Undisclosed

$14.6

$24.5

University of Michigan

Royalty on Cerdelga

2022

$64.0

$29.7

Lilly

Royalty on solanezumab

2030

N/A

$161.4

Direct Flow

Note (Impaired)

2018

$57.0

$48.1

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

$146.7

$154.8

AcelRx

Royalty on Zalviso

2027

$71.8

$67.5

Ariad

Royalty on Iclusig

2033

$50.3

$87.1

CareView

Note

2022

$18.8

$20.7

Noden

Equity

N/A

N/A

$158.2

Kybella

Royalty

Unknown

N/A

$12.7

Total

 

 

 

$1,144

Net cash (Q216 plus COD less Noden acquisition) ($m)

($11.1)

Total firm value ($m)

$1,133

Total basic shares (m)

165.5

Value per basic share ($)

$6.84

Total options (m)

0.2

Total number of shares

165.8

Diluted value per share ($)

$6.83

Source: Edison Investment Research, company reports.

Financial results and outlook

PDL reported revenue of $21.0m for the quarter, which corresponds to $36.6m in cash generated from operations (offset by the non-cash write-downs). Spending was $9.9m for the quarter in line with Q1 ($9.8m). We expect spending to increase significantly in Q3 to account for the fully incorporated Noden financials associated with a salesforce and other overheads. We forecast spending of approximately $20m for Q316 and Q416, but this should be more than compensated by predicted sales in the range of $34m per quarter, if Tekturna remains on the same sales trajectory. The drug had sales of $154m in 2015 and $73m for H116. Earnings for Q216 were $4.1m, which is substantially lower than previous quarters ($55.8m for Q116) due to the Queen et al. royalty stream reduction.

The company ended the quarter with $116m in unrestricted cash and $106m in restricted cash to finance the Noden/Tekturna deal. The company also placed $75m in a long-term certificate of deposit, presumably to serve as collateral for the remaining portion of the Tekturna acquisition cost due to Novartis in July 2017. We do not expect PDL to need additional financing in the future, and we believe that it will not need to refinance its current outstanding debt of $233m in convertible notes (4% due 1 February 2018, $9.17 conversion price). We expect an aggregate $132m in additional debt to be issued to Noden to complete the Tekturna transaction based on PDL’s guidance. However, should Noden fail to secure this financing, PDL is obligated to provide the cash itself. Based on the recent announcement suspending dividends, we do not include any in our forecasts, although the company may decide to reinstate them at any point if financial conditions change.

Exhibit 2: Financial summary

$000s

2014

2015

2016e

2017e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

581,225

590,448

224,947

197,914

Cost of Sales

0

0

(10,307)

(19,113)

Gross Profit

581,225

590,448

214,640

178,802

General & Administrative

(34,914)

(36,090)

(59,791)

(80,321)

EBITDA

 

 

546,311

550,379

154,849

98,481

Operating Profit (before GW and except.)

 

546,311

550,379

154,849

98,481

Intangible Amortisation

0

0

0

(13,267)

Other

0

(3,979)

0

0

Exceptionals

0

0

0

0

Operating Profit

546,311

550,379

154,849

85,214

Net Interest

(38,896)

(26,691)

(20,330)

(25,960)

Other

(6,143)

6,450

0

0

Profit Before Tax (norm)

 

 

501,272

530,138

134,519

72,521

Profit Before Tax (FRS 3)

 

 

501,272

530,138

134,519

59,254

Tax

(179,028)

(197,343)

(42,735)

(12,007)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

322,244

332,795

91,783

60,514

Profit After Tax (FRS 3)

322,244

332,795

91,783

47,247

Minority interest

 

 

0

0

(3,968)

(7,358)

Profit After Tax less Minority Interest (FRS 3)

322,244

332,795

87,815

39,889

Average Number of Shares Outstanding (m)

158.2

163.4

164.9

168.2

EPS - normalised (c)

 

 

203.66

203.69

53.27

31.61

EPS - FRS 3 (c)

 

 

203.66

203.69

53.27

23.72

Dividend per share (c)

61.1

60.2

10.0

0.0

Gross Margin (%)

100.0

100.0

95.4

90.3

EBITDA Margin (%)

94.0

93.2

68.8

49.8

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

94.0

93.2

68.8

49.8

BALANCE SHEET

Fixed Assets

 

 

606,453

733,468

986,210

843,456

Intangible Assets

0

0

199,000

185,733

Tangible Assets

62

31

34

37

Royalty rights

259,244

399,204

387,675

349,988

Other

347,147

334,233

399,501

307,698

Current Assets

 

 

355,897

279,731

274,331

445,002

Stocks

0

0

0

0

Debtors

300

0

2,881

2,881

Cash

291,377

218,883

146,837

342,366

Other

64,220

60,848

124,613

99,754

Current Liabilities

 

 

(187,983)

(36,662)

(111,604)

(277,358)

Creditors

(318)

(394)

(1,073)

(1,073)

Short term borrowings

(175,496)

(24,966)

0

(254,754)

Other

(12,169)

(11,302)

(110,531)

(21,531)

Long Term Liabilities

 

 

(313,930)

(283,485)

(371,879)

(187,088)

Long term borrowings

(276,228)

(232,835)

(316,791)

(132,000)

Other long term liabilities

(37,702)

(50,650)

(55,088)

(55,088)

Net Assets

 

 

460,437

693,052

777,058

824,012

Minority Interests

0

0

(9,000)

(12,840)

Shareholder equity

 

 

460,437

693,052

768,058

811,172

CASH FLOW

Operating Cash Flow

 

 

292,281

301,465

69,995

11,340

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(49)

(9)

(199,024)

(24)

Acquisitions/disposals

21,360

(71,593)

(5,265)

75,374

Financing

0

0

0

1

Dividends

(96,557)

(98,307)

(16,433)

0

Other

(159,420)

(8,046)

28,681

51,840

Net Cash Flow

57,615

123,510

(122,046)

138,531

Opening net debt/(cash)

 

 

300,978

160,347

38,918

169,954

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

83,016

(2,081)

(8,990)

(12,964)

Closing net debt/(cash)

 

 

160,347

38,918

169,954

44,388

Source: Edison Investment Research, PDL BioPharma reports.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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.
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Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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