headache-1540220

Noden deal closes

PDL BioPharma 15 July 2016 Update

PDL BioPharma

Noden deal closes

Business update

Pharma & biotech

15 July 2016

Price

US$3.27

Market cap

US$540m

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

4.5

(9.9)

(49.2)

Rel (local)

0.2

(13.3)

(50.5)

52-week high/low

US$6.56

US$2.75

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 events

Earnings

Q216

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 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
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

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
($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

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.

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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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

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

Share this with friends and colleagues