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Q1 earnings

PDL BioPharma 10 May 2017 Update
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PDL BioPharma

Q1 earnings

Financial update

Pharma & biotech

10 May 2017

Price

US$2.27

Market cap

US$365m

Net cash ($m) at 31 March 2017

99.2

Shares in issue

161.0m

Free float

90.8%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.2

1.8

(29.9)

Rel (local)

8.3

(2.0)

(39.8)

52-week high/low

US$3.7

US$2.0

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 purchasing approved drugs to be sold by Noden Pharma.

Next events

Acquire additional products for Noden platform

2017/18

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 BioPharma recently reported Q117 earnings. Its subsidiary Noden Pharma (of which it currently owns 98%) started commercialization efforts for the Tekturna franchise in late February with a ~40 person salesforce and has co-pay cards and 30-day starter pack vouchers in place. It is too early to tell how successful they have been, but physician feedback and recent prescription data have been positive. Also, the company continues to receive royalty payments for Tysabri for longer than expected; it was paid $14.2m in Q117. It is also set to receive $19.5m as part of a patent settlement with Merck related to Keytruda.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/15

590.4

530.1

2.04

0.60

1.1

26.4

12/16

244.3

175.5

0.78

0.10

2.9

4.4

12/17e

182.1

78.5

0.34

0.00

6.7

N/A

12/18e

142.2

39.6

0.20

0.00

11.4

N/A

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

Tekturna may have reached the bottom

Tekturna (aliskiren) is a mature product that has had steadily declining sales due to stroke and renal concerns as well as a lack of Novartis detailing. With commercialization efforts by Noden only initiating in late-February, it is too early to tell if prescription declines have been slowed or even reversed, but recent data from Wolters Kluwer for the month of March have been positive.

Keytruda patent settlement

In 2015, PDL filed a complaint against Merck for patent infringement related to its oncology product Keytruda. The patent litigation is now settled and Merck will pay PDL a one-time payment of $19.5m in exchange for a license.

Repurchase of shares underway

In March, PDL announced a $30m share repurchase program that would last until March 2018. Since inception of the program, the company has already repurchased around 7.6m shares for a total of $16.4m at an average price of $2.16.

Valuation: $816m or $5.07 per share

We have increased our valuation of PDL from $791m or $4.78 per share to $816m or $5.07 per share. This was mainly due to a higher than expected Q117 net cash balance and a fall in the number of shares outstanding due to the share repurchase program. We expect to review our valuation pending further clarity on Tekturna sales trends as well as the acquisition of additional products for the Noden Pharma commercial organization to sell.

Quarterly update

PDL recently reported results for Q1 and provided an update on numerous assets. Notably, 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 Q416. 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. We do not include this revenue in our forecasts and valuation due to lack of insight into these inventory levels and the fact that these payments could stop at any time.

Also, PDL announced a patent settlement (related to Queen et al.) with Merck related to Keytruda, its humanized antibody product for various cancers. PDL will receive a one-time, lump-sum payment of $19.5m (to be recorded by the company in Q217) in exchange for a royalty-free, non-exclusive license to certain Queen et al. patent rights. Beyond this case, there does not appear to be any ongoing litigation with regards to the Queen et al. patents so we do not expect other such settlements.

Noden’s ~40 person salesforce is now up and running and commercializing the Tekturna franchise in the US (it is also set to assume commercialization activities in the rest of the world in H217). A few challenges helped suppress Tekturna sales in the quarter, including commercialization efforts starting later in the quarter than expected, some negative formulary changes and the continuation of the prescription erosion that has been seen over the last several years. It is too early to tell how successful the Noden salesforce is in reversing the negative trends but prescription data from Walters Kluwer indicate that prescriptions in the month of March were up 11.3% compared to February. Due to a greater number of selling days, March prescriptions are typically higher in number than those for February, but this recent jump is higher than the jump normally seen at this time period for Tekturna (6-10% since 2014). Also, the CEO of Noden Pharma resigned on 20 April for undisclosed reasons. It is unclear what impact this change in leadership will have on the commercialization efforts, if any.

With regards to its note agreements, the company previously wrote off $51.1m of its Direct Flow Medical assets in Q416 and was able to monetize $7.9m of assets in Q117. As of the end of Q1, the only Direct Flow assets remaining on the books are foreclosed assets recorded as assets held for sale and have a carrying value of $2.1m. In April, a bankruptcy court approved the reorganization plan for LENSAR, a laser cataract surgery system company that filed for bankruptcy in December. It is expected to emerge from bankruptcy later in May and become one of PDL’s operating subsidiaries.

Valuation

We have increased our valuation of PDL from $791m or $4.78 per share to $816m or $5.07 per share. This was mainly due to a higher than expected Q117 net cash balance and a fall in the number of shares outstanding due to the share repurchase program. We expect to review our valuation pending further clarity on Tekturna sales trends as well as the acquisition of additional products for the Noden Pharma commercial organization to sell.

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

$161.6

$231.3

VB

Royalty on Spine Implant

Undisclosed

$15.2

$17.7

University of Michigan

Royalty on Cerdelga

2022

$35.7

$12.7

Direct Flow

Note (Impaired)

2018

$2.1

$2.1

Wellstat

Note (Impaired)

Unknown

$50.2

$50.2

Hyperion

Note (Impaired)

Unknown

$1.2

$1.2

Avinger

Royalty

2018

$1.6

$2.2

Lensar

Note (Impaired)

2018

$43.9

$43.9

Kaleo

Note

2029

$146.7

$153.6

AcelRX

Royalty on Zalviso

2027

$69.6

$72.5

CareView

Note

2022

$19.1

$20.7

Noden

Equity

N/A

N/A

$103.5

Kybella

Royalty

Unknown

$10.3

$5.0

Total

 

 

 

$717

Net cash (Q117) ($m)

$99.2

Total firm value ($m)

$816

Total basic shares (m)

161.0

Value per basic share ($)

$5.07

Total options (m)

0.2

Total number of shares

161.2

Diluted value per share ($)

$5.06

Source: Edison Investment Research

Financials

PDL reported revenue of $45.4m for the quarter, down sequentially from $66.5m in Q416 due to a large jump in the fair value of its royalty rights in Q416 as well as lower Noden revenues in Q117. However, we have increased our estimated 2017 revenues from $152.2m to $182.1m mainly due to the Tysabri royalty and Merck settlement. R&D and SG&A spending totaled $16.9m in Q117, up from $15.0m last quarter, mainly due to higher sales and marketing expenses related to Noden. The company ended the quarter with $314.3m in cash, $20.0m in short-term investments and $75m in a long-term certificate of deposit, which serves as collateral for the remaining portion of the Tekturna acquisition cost due to Novartis in July 2017. In March, the company announced a $30m share repurchase program that would last until March 2018. Since inception of the program, the company has already repurchased around 7.6m shares for a total of $16.4m at an average price of $2.16.

Exhibit 2: Financial summary

$000s

2015

2016

2017e

2018e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

590,448

244,301

182,052

142,231

Cost of Sales

0

(4,065)

(13,522)

(12,542)

Gross Profit

590,448

240,236

168,530

129,689

General & Administrative

(36,090)

(43,287)

(63,929)

(65,530)

EBITDA

 

 

550,379

193,129

97,537

57,095

Operating Profit (before GW and except.)

 

550,379

193,129

97,537

57,095

Intangible Amortization

0

(12,028)

(24,057)

(24,057)

Other

(3,979)

0

0

0

Exceptionals

0

(51,699)

(1,442)

0

Operating Profit

550,379

129,402

72,038

33,038

Net Interest

(26,691)

(17,679)

(19,010)

(17,524)

Other

6,450

(2,353)

0

0

Profit Before Tax (norm)

 

 

530,138

175,450

78,527

39,571

Profit Before Tax (FRS 3)

 

 

530,138

109,370

53,028

15,514

Tax

(197,343)

(45,711)

(22,657)

(6,361)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

332,795

129,739

55,869

33,210

Profit After Tax (FRS 3)

332,795

63,659

30,370

9,153

Minority interest

0

(53)

(188)

(188)

Profit After Tax less Minority Interest (FRS 3)

332,795

63,606

30,182

8,965

Average Number of Shares Outstanding (m)

163.4

163.8

161.8

163.4

EPS - normalized ($)

 

 

2.04

0.78

0.34

0.20

EPS - FRS 3 ($)

 

 

2.04

0.39

0.19

0.05

Dividend per share ($)

0.60

0.10

0.0

0.0

Gross Margin (%)

100.0

98.3

92.6

91.2

EBITDA Margin (%)

93.2

79.1

53.6

40.1

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

93.2

79.1

53.6

40.1

BALANCE SHEET

Fixed Assets

 

 

733,468

818,949

754,111

667,392

Intangible Assets

0

228,542

204,485

180,428

Tangible Assets

31

1,631

3,730

5,134

Royalty rights

399,204

402,318

266,194

227,078

Other

334,233

186,458

279,702

254,752

Current Assets

 

 

279,731

395,147

443,922

417,717

Stocks

0

0

0

0

Debtors

0

40,120

21,679

21,679

Cash

218,883

147,154

395,885

370,180

Other

60,848

207,873

26,358

25,858

Current Liabilities

 

 

(36,662)

(130,315)

(190,465)

(64,065)

Creditors

(394)

(7,016)

(17,956)

(17,956)

Short term borrowings

(24,966)

0

(126,400)

0

Other

(11,302)

(123,299)

(46,109)

(46,109)

Long Term Liabilities

 

 

(283,485)

(329,649)

(203,213)

(203,213)

Long term borrowings

(232,835)

(232,443)

(116,052)

(116,052)

Other long term liabilities

(50,650)

(97,206)

(87,161)

(87,161)

Net Assets

 

 

693,052

754,132

804,356

817,830

Minority Interests

0

0

0

0

Shareholder equity

 

 

693,052

754,132

804,356

817,830

CASH FLOW

Operating Cash Flow

 

 

301,465

101,718

70,627

23,430

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(9)

(109,963)

(534)

(1,422)

Acquisitions/disposals

(71,593)

13,082

176,876

78,234

Financing

0

0

0

0

Dividends

(98,307)

(16,583)

(21)

0

Other

(8,046)

(47,629)

9,430

500

Net Cash Flow

123,510

(59,375)

256,378

100,741

Opening net debt/(cash)

 

 

160,347

38,918

85,289

(153,433)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

(2,081)

13,004

(17,656)

(47)

Closing net debt/(cash)

 

 

38,918

85,289

(153,433)

(254,128)

Source: Edison Investment Research, PDL BioPharma accounts

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 2017 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 2017. “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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 2017 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 2017. “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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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