headache-1540220

PDL’s new investment strategy

PDL BioPharma 2 June 2016 Update

PDL BioPharma

PDL’s new investment strategy

Pending acquisition

Pharma & biotech

2 June 2016

Price

US$3.46

Market cap

US$571m

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

(5.2)

10.2

(48.4)

Rel (local)

(6.0)

3.8

(48.1)

52-week high/low

US$6.7

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 events

Expected Tekturna deal closure

June 2016

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

In a change of strategic direction, PDL announced in May 2016 that the company will be acquiring a majority equity stake in the newly formed Noden Pharma. Noden will use the capital along with additional funds from debt to finance the acquisition of the blood pressure drugs Tekturna and Tekturna HCT from Novartis for a total of $294m in upfronts and milestones. PDL is expected to provide $145m in return for an 88% equity stake, but is obligated to finance any shortfalls in additional planned debt financing.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

581.2

501.3

2.04

0.61

1.7

17.6

12/15

590.4

530.1

2.04

0.60

1.7

17.6

12/16e

154.5

97.5

0.37

0.20

9.4

5.8

12/17e

69.4

9.3

0.04

0.20

86.5

5.8

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

A unique and effective drug

Tekturna (aliskiren) was approved in 2007 for the treatment of high blood pressure. It is unique in that it is the only currently approved renin inhibitor. Tekturna HCT is a coformulation of the active ingredient in Tekturna with the diuretic hydrochlorothiazide widely prescribed for hypertension. The two formulations showed mean reductions in systolic blood pressure of 14.8 and 21.2 mmHg respectively (compared to 13 mmHg for Monopril and 19 mmHg for Norvasc).

Sales off peak but long tail expected

Tekturna had peak sales of $557m in 2011. However, a trial in the same year showed some evidence of increased stroke and renal complication risk in diabetic patients. Sales declines have stabilized at 8.7% over the past 12 months (Symphony Health) and the drug sold $156m in 2015. We expect a long tail on sales because despite a 2018 composition of matter patent expiration there is little incentive for generic development and significant manufacturing barriers.

Deal is immediately accretive, provides a new vehicle

Tekturna would provide immediate, high-margin revenue streams to PDL and is immediately accretive. Moreover, Noden provides a new investment vehicle for the company, allowing it to diversify away from royalty and debt deals into real assets.

Valuation: Unchanged until deal close

We are not updating our valuation of PDL ($1,036m or $6.28 per basic share) until the closing of the Tekturna transaction. However, through NPV analysis, we would value PDL’s potential share of the asset at $215m. Noden’s financials would be consolidated with PDL in that event. The risks associated with the deal are that Tekturna sales could decline at a faster rate than predicted or that Noden could fail to obtain additional financing, obligating PDL to finance the entire acquisition cost.

Investment summary

PDL announced on May 24, 2016 that the company would acquire a majority equity stake (88%) in Noden Pharma. Noden Pharma is a new company formed to acquire the hypertension drugs Tekturna (aliskiren) and Tekturna HCT (aliskiren and hydrochlorothiazide) from Novartis (known as Rasilez and Rasilez HCT outside of the US). The deal is expected to close 30 days after the announcement. This is the first equity-based deal that PDL has initiated, and the first marketed drug it has been operationally involved with. Moreover, Noden may serve as a vehicle for future drug acquisitions and will provide an additional avenue for PDL to invest capital.

The drug

Tekturna was approved in 2007 for the treatment of hypertension. It is unlike any other marketed antihypertensive drugs because it is an inhibitor of renin. Renin is the enzyme responsible for the generation of angiotensin I and therefore has a critical role in regulating blood volume and vasoconstriction. The product was evaluated in six double-blind, placebo-controlled studies and demonstrated a reduction in systolic blood pressure of 14.8 mmHg (for a 300mg dose) compared to 5.7 for placebo. Tekturna HCT is a co-formulation of the active drug in Tekturna with hydrochlorothiazide, a diuretic commonly prescribed for hypertension. The addition of the drug to the formulation increased the total change in systolic blood pressure to 21.2 mmHg compared to 7.5 for placebo in the Phase III trial. For comparison, during a head-to-head study the ACE inhibitors Norvasc (amlodipine) and Monopril (fosinopril) reduced systolic blood pressure by 19 and 13 mmHg respectively.1

  Tatti P, et al. (1998). Outcome Results of the Fosinopril Versus Amlodipine Cardiovascular Events Randomized Trial (FACET) in Patients With Hypertension and NIDDM. 21(4), 597-603

The combined Tekturna brand had sales of $156m in 2015. Sales of the drug have been steadily declining from a peak of $557m in 2011, when a clinical trial of the drug showed a high number of kidney problems and strokes among diabetic patients. The drug was the subject of a number of past and ongoing legal challenges associated with possible stroke and renal complications. Novartis halted promotion of the drug following the clinical result, and we expect residual sales to continue to decline under the new partnership. However, sales likely represent a stable population of patients that are well controlled by the medication. This is evidenced by the fact that the decline in sales has slowed from approximately 30% per year following the clinical results to 8.7% over the past 12 months (according to Symphony Health).

Exhibit 1: Tekturna sales

Source: Novartis, PDL BioPharma

Tekturna is covered by a composition of matter patent until 2018 in the US and 2020 in the EU. The drug is additionally protected by manufacturing patents until 2026, which are a significant barrier due to the difficulty in synthesizing the drug. We do not expect significant competition from generics because the dwindling market for the drug does not warrant the manufacturing investment.

The deal

This multi-tiered deal involves equity investment from PDL in Noden Pharma, which will subsequently use the capital (in addition to other funds) for the acquisition of Tekturna from Novartis. Noden will purchase the drug for $110m on the date of the closing with $89m due on the one-year anniversary and up to $95m in milestones related to sales and generic entrants. PDL will support the transaction by providing $75m at the time of closing and expects to provide least $32m on the first year anniversary and $38m for milestones for a predicted total cost of $145m. Noden will seek additional financing for the transaction via debt, but PDL has agreed to finance any shortfalls, which could potentially obligate it to finance the entirety of the deal. PDL will receive an equity stake corresponding to 88% from the transaction.

Valuation

We are not updating our valuation of PDL ($1,036m or $6.28 per basic share) to reflect Tekturna sales until the closing of the acquisition. For illustrative purposes, we currently value the asset at $245m based on an NPV analysis with a WACC of 10%. PDL’s 88% equity stake corresponds to $215m. We have included the $95m in expected future milestone payments (but no other features of the deal) in the valuation. We are including the total amount of milestone payable because we expect neither generic entrants nor substantial declines in sales during the near term, which are the basis for the payments. We predict a decline in sales of approximately 10% per year, which is in line with the decline in sales over the preceding 12 months as reported by Symphony Health (8.4%). Our modelled profit margin for the product is approximately 50%. We model a COGS of 15%, which is higher than average for pharmaceutical products, based on communication with the company expressing the difficulty in manufacturing the drug. We expect the company to maintain a small salesforce (estimated 10-20), which we account for with a 10% cost of selling and $5m in yearly fixed SG&A costs. Noden is domiciled in Ireland and we have assumed the standard 12.5% corporate tax rate, although the effective rate may be higher if PDL choses to repatriate earnings to the US. Based on these predictions PDL will be able to recoup its targeted $145m outlay in H217. There is a near-term risk associated with the transaction that Noden may not be able to raise the additional capital (up to $149m) necessary to finance the transaction, and PDL would be obligated to cover the shortfall. An additional risk is that sales of Tekturna may decline at a faster than predicted pace. However, as currently valued, the deal is immediately accretive for PDL.

Financials

We predict Tekturna sales of $69m for H216 and $127m for 2017, corresponding to $32m and $58m in earnings paid to PDL respectively during these periods. However, these values are provided for illustrative purposes only, and we are not including this revenue in our forecasts until after the closing of the transaction. We do not predict that Noden will have difficulty financing the remainder of the transaction costs ($149m at most) or servicing the resultant debt, as this equates to approximately two years of our predicted EBITDA for the product. However, the resultant terms of this financing may have a material impact on our forecasts. If the deal closes, Noden financials will be consolidated with PDL on the basis of PDL’s majority ownership.

Exhibit 2: Financial summary

US$000s

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 - normalised (c)

 

 

203.66

203.69

37.46

3.60

EPS - FRS 3 (c)

 

 

2.04

2.04

0.37

0.04

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: PDL BioPharma accounts, Edison Investment Research

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