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Q318 results

PDL BioPharma 13 November 2018 Update
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PDL BioPharma

Q318 results

Financial update

Pharma & biotech

13 November 2018

Price

US$2.84

Market cap

US$414m

Net cash ($m) at 30 September 2018

251.0

Shares in issue

146.0m

Free float

90.6%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.3

18.8

(6.6)

Rel (local)

13.9

23.5

(11.5)

52-week high/low

US$3.1

US$2.3

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 specialty pharmaceutical sales through Noden Pharma.

Next events

China Rasilez launch

H119

Analysts

Maxim Jacobs

+1 646 653 7027

Briana Warschun

+1 646 653 7031

PDL BioPharma is a research client of Edison Investment Research Limited

PDL reported Q318 revenues of $67.9m, up 8.2% compared to Q317 and up 45.8% sequentially, with that growth mainly due to an increase in the fair value of the Assertio (formerly Depomed) royalty rights. Noden Product revenue of $17.8m was up 17.9% compared to Q317 but was down 31.2% sequentially, mainly due to the bulk purchasing by distribution partner Orphan Pacific for the Japanese market launch in Q218. Importantly, PDL recently announced a $100m stock repurchase program which at current prices would buy back approximately 25% of the common shares outstanding.

Year
end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/16

244.3

175.5

0.78

0.10

3.6

3.5

12/17

320.1

200.3

0.81

0.00

3.5

N/A

12/18e

189.4

66.1

0.46

0.00

6.2

N/A

12/19e

126.9

34.9

0.21

0.00

13.5

N/A

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

Cost cutting at Noden improves profitability

In August, PDL announced that Noden would discontinue its 60+ person contract salesforce and instead contract with Archer Healthcare to focus on email, direct mail and telesales. As a result, Noden reduced sales and marketing expenses by $1.6m in Q318, while net income increased to $4.1m, up from $1.1m in Q317.

Continuing to look for acquisitions

The company is continuing to look for additional product acquisitions with a focus on commercial assets but also stated that it is looking at products that are still in development. The latter would represent a big change in strategy as the company has avoided such products and the large R&D expenditures that go with them. In our view, this move is unlikely as the company has historically been conservative in its acquisitions and price conscious even when it has liked an asset.

$100m stock repurchase program

In September, PDL announced a $100m share repurchase program, a course of action that has been promoted by certain investors. At current prices the program would enable PDL to repurchase around 25% of the common shares outstanding. Since March 2017, the company has bought back $55m worth of shares via share repurchase programs.

Valuation: $786m or $5.39 per share

We have adjusted our valuation from $783m or $5.39 per basic share to $786m or $5.39 per share. The increase in the total valuation is mainly due to a higher level of net cash, mitigated by slightly lower valuations for Noden and AcelRx. The value per share is unchanged due to a slightly higher number of shares.

Earnings

PDL reported Q318 revenues of $67.9m, up 8.2% compared to Q317 and up 45.8% sequentially. The growth in revenues was mainly due to an increase in the fair value of the Assertio (formerly Depomed) royalty rights following PDL’s purchase of Assertio’s remaining interest in those assets for $20m. Revenue associated with royalty rights totalled $42.2m during the quarter with $17.5m due to Assertio cash royalties and $31.6m due to a change in fair value of the Assertio royalty rights. The company also lowered its fair value estimates for AcelRx by $9.2m during the quarter to $68.3m due to lower expectations for that royalty stream.

Noden Product revenue of $17.8m was up 17.9% compared to Q317, but down 31.2% versus Q218. The sequential decline was mainly due to a $6.8m drop in Asian sales as the bulk purchasing by distribution partner Orphan Pacific for the Japanese market launch in Q218 subsided. As a reminder, Lee’s Pharmaceutical Holdings, which has licensed the rights to Tekturna/Rasilez in China, Hong Kong, Macau and Taiwan, is expected to launch in China in H119. Our current forecasts do not include any revenues for Tekturna/Rasilez in China, so any meaningful sales there could provide additional upside.

The company previously announced the decision to eliminate its 60+ person contract salesforce, and instead has contracted Archer Healthcare to focus on email, direct mail and telesales. As the contract salesforce had made little headway in reversing the exponential decline in prescriptions, the impact on prescriptions has been minimal but profitability has improved. The change took effect in August and in Q318 the company saved $1.8m in sales and marketing expenses. Net income for the Noden subsidiary increased to $4.1m during the quarter, up from $1.1m in Q317.

Additionally, LENSAR generated revenues of $6.6m in Q318, up 12% compared to Q218 with seven systems sold during the quarter. Profitability also improved with a quarterly loss of $0.9m versus $1.9m last quarter.

CEO retiring

The company announced that John McLaughlin, the CEO since December 2008, intends to retire at the end of 2018. He will be replaced by Dominique Monnet, PDL’s president, who has been with the company since September 2017. Mr Monnet was previously senior vice president and chief marketing officer at Alexion Pharmaceuticals, a now $28 billion company and prior to that he was at Amgen for 10 years where he held various commercial positions. It is unclear if the new CEO will lead to a change in strategy although at the results the company stated that it intends to look at potentially acquiring development stage assets, which is a change as PDL has previously focused on commercial stage assets. However, on the Q318 conference call, Mr Monnet reiterated that the company “will advance very cautiously in this area.”

Valuation

We have adjusted our valuation from $783m or $5.39 per basic share to $786m or $5.39 per share. The higher total valuation was mainly due to a higher level of net cash but was mitigated by slightly lower valuations for Noden and AcelRx. The value per share is unchanged as a slightly higher number of shares offsets the total valuation increase.

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

Assertio (formerly Depomed)

Royalty on Glumetza and other products

2024

$265.7

$281.8

VB

Royalty on Spine Implant

Undisclosed

$13.9

$16.5

University of Michigan

Royalty on Cerdelga

2022

$27.5

$14.4

Wellstat

Note (Impaired)

Unknown

$50.2

$50.2

Hyperion

Note (Impaired)

Unknown

$1.2

$1.2

Lensar

Equity

N/A

$53.1

Acelrx

Royalty on Zalviso

2027

$68.3

$73.4

Careview

Note

2022

$19.4

$20.5

Noden

Equity

N/A

$40.1

$23.5

Kybella

Royalty

Unknown

$2.9

$0.9

Total

 

 

 

$535

Net cash (Q318) ($m)

$251.0

Total firm value ($m)

$786

Total basic shares (m)

146.0

Value per basic share ($)

$5.39

Total options

0.0

Total number of shares (m)

146.0

Diluted value per share ($)

$5.39

Source: Edison Investment Research, company reports

Financials

We have increased our estimated FY18 revenues to $189.4m from $176.1m, but decreased our estimated FY19 revenues to $126.9m from $145.5m. The increase in FY18 revenue estimates was due to the increase in the fair value of the Assertio royalties, partially offset by a lower than expected run rate for Noden. The decrease in FY19 revenues is due to our more conservative revenue forecasts for Noden. We have decreased our SG&A estimates to $69.6m from $74.0m for FY18, and to $72.4m from $76.9m for FY19, mainly due to cost cutting at Noden. The company ended the quarter with $401.0m in cash ($251.0m in net cash).

Exhibit 2: Financial summary

$000s

2016

2017

2018e

2019e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

244,301

320,060

189,361

126,862

Cost of Sales

(4,065)

(30,537)

(45,163)

(19,742)

Gross Profit

240,236

289,523

144,198

107,120

General & Administrative

(43,287)

(63,324)

(69,614)

(72,399)

EBITDA

 

 

193,129

218,818

71,757

31,894

Operating Profit (before amort. and except.)

193,129

218,818

71,757

31,894

Intangible Amortisation

(12,028)

(24,689)

(15,831)

(15,831)

Other

0

0

0

0

Exceptionals

(51,699)

(349)

(129,897)

0

Operating Profit

129,402

193,780

(73,971)

16,063

Net Interest

(17,679)

(18,562)

(5,676)

2,972

Other

(2,353)

9,309

0

0

Profit Before Tax (norm)

 

 

175,450

200,256

66,081

34,866

Profit Before Tax (FRS 3)

 

 

109,370

184,527

(79,647)

19,035

Tax

(45,711)

(73,826)

1,490

(3,997)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

129,739

126,430

67,571

30,868

Profit After Tax (FRS 3)

63,659

110,701

(78,157)

15,037

Minority interest

(53)

(47)

0

0

Profit After Tax less Minority Interest (FRS 3)

63,606

110,654

(78,157)

15,037

Average Number of Shares Outstanding (m)

163.8

155.4

146.5

149.5

EPS - normalised ($)

 

 

0.78

0.81

0.46

0.21

EPS - FRS 3 ($)

 

 

0.39

0.71

(0.53)

0.10

Dividend per share (c)

10.03

0.00

0.00

0.00

Gross Margin (%)

98.3

90.5

76.1

84.4

EBITDA Margin (%)

79.1

68.4

37.9

25.1

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

79.1

68.4

37.9

25.1

BALANCE SHEET

Fixed Assets

 

 

818,949

611,827

448,927

342,571

Intangible Assets

228,542

215,823

51,318

51,318

Tangible Assets

1,631

16,369

12,430

14,348

Royalty rights

402,318

349,223

348,525

250,938

Other

186,458

30,412

36,654

25,968

Current Assets

 

 

395,147

631,296

540,657

641,099

Stocks

0

0

0

0

Debtors

40,120

31,183

15,437

15,437

Cash

147,154

527,266

446,407

546,849

Other

207,873

72,847

78,813

78,813

Current Liabilities

 

 

(130,315)

(193,109)

(46,672)

(46,672)

Creditors

(7,016)

(19,785)

(9,011)

(9,011)

Short term borrowings

0

(126,066)

0

0

Other

(123,299)

(47,258)

(37,661)

(37,661)

Long Term Liabilities

 

 

(329,649)

(204,124)

(200,202)

(200,202)

Long term borrowings

(232,443)

(117,415)

(124,614)

(124,614)

Other long term liabilities

(97,206)

(86,709)

(75,588)

(75,588)

Net Assets

 

 

754,132

845,890

742,710

736,797

Minority Interests

0

0

0

0

Shareholder equity

 

 

754,132

845,890

742,710

736,797

CASH FLOW

Operating Cash Flow

 

 

101,718

40,624

(9,700)

(5,187)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(109,963)

(1,297)

(5,367)

(1,269)

Acquisitions/disposals

13,082

128,415

76,581

102,410

Financing

0

0

0

0

Dividends

(16,583)

(222)

0

0

Other

(47,629)

212,592

(15,926)

4,488

Net Cash Flow

(59,375)

380,112

45,588

100,442

Opening net debt/(cash)

 

 

38,918

85,289

(283,785)

(321,793)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

13,004

(11,038)

(7,580)

(0)

Closing net debt/(cash)

 

 

85,289

(283,785)

(321,793)

(422,235)

Source: PDL BioPharma accounts, Edison Investment Research

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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.

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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