PDL BioPharma |
Noden deal closes |
Business update |
Pharma & biotech |
15 July 2016 |
Share price performance
Business description
Next events
Analysts
PDL BioPharma is a research client of Edison Investment Research Limited |
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PDL announced on 6 July 2016 the closing of its equity investment in Noden Pharma, which concurrently acquired the Tekturna pharmaceutical brand from Novartis. Tekturna and Tekturna HCT are blood pressure medications with a combined revenue of $154m in 2015. Noden paid $110m for the brand on closing with an additional $89m due on the first year anniversary. In comparison, PDL made an equity investment of $75m and will provide $32m in a year for an 88% equity stake in Noden. According to management, the total financing needed by Noden is up to $334m and PDL is committed to providing this funding if other sources are unavailable.
Year |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
581.2 |
501.3 |
2.04 |
0.61 |
1.6 |
18.7 |
12/15 |
590.4 |
530.1 |
2.04 |
0.60 |
1.6 |
18.3 |
12/16e |
223.3 |
133.0 |
0.54 |
0.20 |
6.1 |
6.1 |
12/17e |
196.8 |
71.4 |
0.31 |
0.20 |
10.5 |
6.1 |
Note: *PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.
Total obligation up to $334m
PDL announced that Noden will require $334m financing in total. This includes the upfront fee of $110m, anniversary fees of $89m, $95m in potential milestones, and $40m in working capital. PDL has provided Noden with a $75m initial equity investment and a 60-day bridge loan up to $75m to cover the remaining portion of the upfront payment and the working capital until other financing can be sourced.
Salesforce of approximately 70 contract reps
The company provided additional detail on the Noden commercial organization. Tekturna will be sold with a salesforce of 70 contract representatives. This force exceeds our initial estimates (of 10-20 internal reps), but the lack of overheads may translate to improved scalability and savings over the long run.
PDL confirms that similar transactions are coming
PDL announced that the formation of Noden was part of a strategy to capitalize on the large number of divestitures that are expected from big pharma and specialty pharma companies. PDL intends to opportunistically acquire additional assets in the near future.
Valuation: Increased to $1,119m or $6.78 per share
We have increased our valuation of PDL to $1,119m or $6.78 per basic share (from $1,036m or $6.28) to include value from Noden. We currently value Noden at $259m, which is greater than our previous illustrative valuation of $245m, due to the scalability of the larger-than-expected contract salesforce. This corresponds to $227m for PDL’s equity share (88%), or $158m adjusted for the anniversary payment. This value is partially offset by the $75m purchase costs to PDL. We expect to update our valuation following the SEC filing of Tekturna commercial details and following initial sales reports for the drug following the transition.
PDL acquires Noden, which acquires Tekturna
On 6 July 2016, PDL BioPharma announced that it had completed the acquisition of a majority position (88%) of Noden Pharma DAC. Noden is a company that was recently formed to purchase and commercialize the Tekturna brand (including Tekturna and Tekturna HCT, known as Rasilez and Rasilez HCT outside of the US) from Novartis. The brand sold a combined $154m in 2015. This asset acquisition also closed on 6 July 2016. PDL has transferred its initial payment of $75m to Noden to support the $110m upfront fee for the drug. Noden owes Novartis $89m on the one-year anniversary of the deal and up to $95m in milestones, of which PDL expects to provide $32m and $38m, respectively. These details are consistent with the previous announcement of the deal.
According to the latest announcement, PDL has provided Noden a short-term loan (60 days) of up to $75m to cover costs until Noden can secure debt financing to cover the portion of the Tekturna deal not supported by PDL. Noden will initially be financed with $40m in working capital, bringing the total amount of potential funding requirement to $334m.
PDL also provided more information on the commercial strategy for Tekturna. The selling force will consist of approximately 70 contract representatives. This is more than our initial prediction of 10-20 internal reps; the increase in variable costs associated with more representatives is mitigated by lower fixed costs. The company intends to target both cardiologists and general practitioners, initially targeting high prescribers.
The composition of matter patent for Tekturna expires in 2018 (2020 in Europe). However, we do not expect significant generic competition. The molecule is difficult to manufacture and manufacturing methods are protected until 2021. The Tekturna acquisition includes a transfer of manufacturing know-how from Novartis. We believe that manufacturing provides a barrier too high for generic entry considering the lack of promotion and declining market for the product.
The product transfer in the US will occur over the 90 days following the official closing of the deal (1 July 2016), but may take longer in other countries. The company will also file a special report on Tekturna sales and costs with the SEC by 75 days after the closing date, at which time more detailed information about the operation under Novartis will be released.
PDL also emphasized that Noden (or a similarly structured organization) will serve as a vehicle to acquire additional pharmaceutical products. The company noted that market conditions have created a situation where there are multiple pharmaceutical companies interested in divesting assets.
Valuation
We have increased our valuation of PDL to $1,119m or $6.78 per basic share, from $1,036m or $6.28 per basic share, to include the value of the equity investment in Noden as the acquisition is now completed. We value Noden at $259m based on an NPV analysis, with PDL’s 88% share representing $227m. This is an increase from our initial estimate of $245m ($215m for PDL’s stake). The increase is due to the announcement that Noden will be using a contract salesforce of approximately 70, instead of our estimates of 10-20 in-house salespeople. To reflect this we have increased the cost of selling to 30% (from 10%) in our model, but removed the fixed selling costs. Because our model predicts declining sales, this structure is more affordable at longer time points, hence the increase in valuation.
Accounting for the discounted future payment to Novartis of $89m, the net value of the equity investment of Noden is $158m. We currently predict the maximum amount of milestones payable ($95m) because we do not predict substantial declines in sales or generic entrants. There are two primary risks to this investment: sales risk, due to declining revenue from the product, and financing risk associated with the transaction. We currently model a decline in sales of approximately 10% year-on-year. This decline is slower than the decline in sales reported by Novartis in yearly reports, but is in line with Symphony health data of the past 12 months (8.4%), and we believe that the decline has stabilized. We predict cost of goods at 15%, which is higher than average owing to the difficulty reported in manufacturing the compound.
We predict margins for the product of approximately 50%, but this is in part due to low tax rates from Noden’s Irish domicile (12.5%), and this margin may be negatively affected if PDL is required to repatriate earnings to the US. Noden will require up to $149m in additional financing to make Novartis whole, which it intends to finance via debt. There is a risk, albeit small in our estimation, that the company will not be able to obtain financing with reasonable terms and PDL will be obligated to provide the funds itself. Given that the maximum additional funds needed to complete the transaction are less than 2015 sales of Tekturna, we do not predict substantial difficulty in securing these loans. We will revisit our valuation following these financings or sales reported for the product in future filings (note the SEC filing for Tekturna is due in September 2016).
Exhibit 1: PDL valuation
Royalty/partner/note |
Type |
Expiration year |
PDL balance sheet carrying value ($m) |
NPV |
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 |
Direct Flow |
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 |
Noden |
Equity |
N/A |
N/A |
$158.2 |
Total |
|
|
|
1,135 |
Net cash/ (debt) (Q116 less Noden acq.) ($m) |
(15.2) |
|||
Total firm value ($m) |
1,119 |
|||
Total basic shares (m) |
165.1 |
|||
Value per basic share ($) |
6.78 |
|||
Total options |
0.1 |
|||
Total number of shares |
165.2 |
|||
Diluted value per share ($) |
6.77 |
|||
Source: Edison Investment Research, company reports
Financials
We have fully consolidated Noden financials, and we are now including the revenue from Noden in our projections, which corresponds to $69m for H216 and $127m for 2017 (at 100%). This equates to an increase in PDL earnings of $29m and $54m for the two periods, respectively after minority interests ($4m and $7m). The Tekturna acquisition is recorded as a $199m intangible asset CAPEX, with the remainder of the acquisition fee payable on the one-year anniversary ($89m) recorded as restricted cash. We amortize this asset over 15 years. The additional financing for the acquisition and Noden working capital is recorded as $75m in debt in 2016 and $57m in 2017. All of this accounting should be seen as illustrative and we expect to reconcile our forecasts with PDL’s accounting for the acquisition, once it is disclosed.
Exhibit 2: 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 |
223,251 |
196,831 |
Cost of Sales |
0 |
0 |
(10,307) |
(19,113) |
||
Gross Profit |
581,225 |
590,448 |
212,944 |
177,718 |
||
General & Administrative |
(34,914) |
(36,090) |
(59,592) |
(80,321) |
||
EBITDA |
|
|
546,311 |
550,379 |
153,352 |
97,397 |
Operating Profit (before GW and except.) |
546,311 |
550,379 |
153,352 |
97,397 |
||
Intangible Amortization |
0 |
0 |
0 |
(13,267) |
||
Other |
0 |
(3,979) |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Operating Profit |
546,311 |
550,379 |
153,352 |
84,131 |
||
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 |
133,022 |
71,438 |
Profit Before Tax (FRS 3) |
|
|
501,272 |
530,138 |
133,022 |
58,171 |
Tax |
(179,028) |
(197,343) |
(40,734) |
(12,007) |
||
Deferred tax |
(0) |
(0) |
(0) |
(0) |
||
Profit After Tax (norm) |
322,244 |
332,795 |
92,287 |
59,430 |
||
Profit After Tax (FRS 3) |
322,244 |
332,795 |
92,287 |
46,164 |
||
Minority interest |
|
|
0 |
0 |
(3,968) |
(7,358) |
Profit After Tax after Minority Interest (FRS 3) |
322,244 |
332,795 |
88,319 |
38,805 |
||
Average Number of Shares Outstanding (m) |
158.2 |
163.4 |
164.2 |
167.5 |
||
EPS - normalized (c) |
|
|
203.66 |
203.69 |
53.80 |
31.10 |
EPS - FRS 3 (c) |
|
|
203.66 |
203.69 |
53.80 |
23.17 |
Dividend per share (c) |
61.1 |
60.2 |
20.0 |
20.0 |
||
Gross Margin (%) |
100.0 |
100.0 |
95.4 |
90.3 |
||
EBITDA Margin (%) |
94.0 |
93.2 |
68.7 |
49.5 |
||
Operating Margin (before GW and except.) (%) |
94.0 |
93.2 |
68.7 |
49.5 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
606,453 |
733,468 |
905,359 |
838,659 |
Intangible Assets |
0 |
0 |
199,000 |
185,733 |
||
Tangible Assets |
62 |
31 |
19 |
7 |
||
Royalty rights |
259,244 |
399,204 |
383,124 |
346,521 |
||
Other |
347,147 |
334,233 |
323,216 |
306,398 |
||
Current Assets |
|
|
355,897 |
279,731 |
344,148 |
404,108 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
300 |
0 |
0 |
0 |
||
Cash |
291,377 |
218,883 |
228,248 |
302,323 |
||
Other |
64,220 |
60,848 |
115,900 |
101,785 |
||
Current Liabilities |
|
|
(187,983) |
(36,662) |
(117,934) |
(283,249) |
Creditors |
(318) |
(394) |
(662) |
(662) |
||
Short term borrowings |
(175,496) |
(24,966) |
0 |
(254,315) |
||
Other |
(12,169) |
(11,302) |
(117,272) |
(28,272) |
||
Long Term Liabilities |
|
|
(313,930) |
(283,485) |
(369,901) |
(185,549) |
Long term borrowings |
(276,228) |
(232,835) |
(316,352) |
(132,000) |
||
Other long term liabilities |
(37,702) |
(50,650) |
(53,549) |
(53,549) |
||
Net Assets |
|
|
460,437 |
693,052 |
761,671 |
773,969 |
Minority Interests |
0 |
0 |
(9,000) |
(12,840) |
||
Shareholder equity |
|
|
460,437 |
693,052 |
752,671 |
761,129 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
292,281 |
301,465 |
74,263 |
544 |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(49) |
(9) |
(199,024)* |
(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) |
106,273 |
(23,160) |
||
Net Cash Flow |
57,615 |
123,510 |
(40,635) |
17,076 |
||
Opening net debt/(cash) |
|
|
300,978 |
160,347 |
38,918 |
88,104 |
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 |
88,104 |
83,992 |
Source: Edison Investment Research, PDL BioPharma reports. Note: FY16 and FY17 estimates include the consolidated financial results of Noden. *FY16e capex relates to the acquisition of intangible (Tekturna brand) from Novartis.
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