Returning value to shareholders

PDL BioPharma 18 February 2020 Outlook
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PDL BioPharma

Returning value to shareholders

2020 outlook

Pharma & biotech

18 February 2020

Price

US$3.67

Market cap

US$457m

Net cash ($m) at 30 September 2019

144.3

Shares in issue

124.4m

Free float

91.9%

Code

PDLI

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.6

22.3

10.2

Rel (local)

13.5

13.6

(7.7)

52-week high/low

US$3.85

US$2.13

Business description

As of December 2019, PDL BioPharma has ceased to make additional strategic transactions and investments and is pursuing a formal process to unlock the value of its portfolio by monetizing its assets and ultimately distributing net proceeds to shareholders.

Next events

FDA approval of Amphora

May 2020

Analysts

Maxim Jacobs

+1 646 653 7027

Wiktoria O’Hare

+1 646 653 7028

PDL BioPharma is a research client of Edison Investment Research Limited

PDL BioPharma has a portfolio of healthcare-related assets. These include the Assertio royalty stream, covering rights for extended release (XR) formulations of metformin, a 29% stake in Evofem, a women’s health company on the brink of commercialization, and LENSAR, a femtosecond laser cataract surgery company. PDL recently announced a decision to cease additional strategic investments and monetize its assets, returning net proceeds to shareholders likely in the form of additional share repurchase programs and/or dividends.

Year end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/17

320.1

200.3

0.81

0.0

4.5

N/A

12/18

198.1

78.8

0.45

0.0

8.2

N/A

12/19e

102.6

(15.9)

(0.16)

0.0

N/A

N/A

12/20e

115.3

7.6

0.06

0.0

61.2

N/A

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

Move to maximize shareholder value

Following the completion of a strategic review process in Q419, PDL decided to cease additional strategic investments and monetize the company’s assets, returning net proceeds to shareholders. It also initiated a $275m share and convertible note repurchase program. This two-pronged strategy is expected to unlock the value of PDL as the stock has typically traded at a discount to its book value ($5.58 per share in Q319).

Evofem: Hormone-free contraceptive option

Evofem, a clinical-stage biopharmaceutical company, is developing Amphora, a hormone-free contraceptive gel. It is a bioadhesive vaginal gel that works by maintaining acidity in the presence of semen, keeping the environment inhospitable to sperm motility. Evofem re-submitted its New Drug Application (NDA) for Amphora and a response from the FDA is expected by 25 May 2020.

LENSAR: Femtosecond laser technology

LENSAR is focused on next-generation femtosecond cataract laser technology for refractive cataract surgery. The LENSAR System was approved by the FDA for anterior capsulotomy, lens fragmentation and corneal and acute incisions and the company expects to have finished 2019 with 107,000 procedures performed using its technology, compared to around 80,000 procedures in 2018.

Valuation: $713m or $5.73 per share

We have decreased our valuation of PDL to $713m or $5.73 per basic share from $767m or $6.17 per share. This is mainly due to adjustments to the value of the Assertio royalties following recent comments made by the CEO of Bausch Health on the expectations for the sales of Glumetza (a major component of the Assertio royalties).

Investment summary

Company description

PDL is a healthcare company with a broad portfolio of assets that it is seeking to monetize. PDL previously focused on investing in late clinical-stage or early commercial-stage pharmaceutical assets with operations structured into four segments: income-generating assets, medical devices, strategic positions and pharmaceutical. In addition to several other income-generating assets, PDL’s highest-valued asset is the Assertio umbrella of products (related to extended release versions of metformin), which provides a meaningful royalty stream. The medical devices segment comprises the femtosecond laser technology company, LENSAR, which focuses specifically on refractive cataract surgery. The strategic positions segment encompasses PDL’s 29% stake in Evofem, a clinical-stage biopharmaceutical company that awaits a response from the FDA regarding its NDA application for Amphora, a hormone-free contraceptive vaginal gel. The pharmaceutical segment comprises the Tekturna (Rasilez in Europe) brand of hypertension drugs, which saw a generic entry in the US market in March 2019.

Valuation: $713m or $5.73 per share

Our model sums the NPV’s of PDL’s different holdings and using that method we value PDL at $713m or $5.73 per basic share, down from $767m or $6.17 per share. This reduction was mainly attributable to adjusting the value of the Assertio royalty stream following recent comments made by the CEO of Bausch Health on the expectations for the sales of Glumetza, a major component of that royalty stream. We value the Assertio royalty stream, the equity stake in Evofem and PDL’s wholly owned subsidiary LENSAR as its most valuable assets.

Financials: Share buybacks and equity stakes

PDL ended Q319 with $294.3m in cash and $150m in principal owed in the form of convertible debt. In December, the company initiated a $275m (upsized later that month from $200m) share and convertible note repurchase program to return value to shareholders. Using this program, the company repurchased $119.3m in debt in exchange for $98m in cash and 13.4m shares of common stock and now has $30.7m in debt outstanding ($19.2m in debt due in December 2021 and $11.5m in debt due December 2024).

Sensitivities: Monetization risk

Following PDL’s most recent strategy shift to cease all strategic investments and monetize assets, it will face a relatively lengthy process since its asset portfolio is not focused on one area within healthcare. PDL estimates this divestiture process will take two to three years or more and will be dependent on several factors including interested parties’ valuation of assets versus book value and the team’s overall ability to execute the transaction. The longer the monetization process takes, the more likely it is that factors such as patent expiration, changes in regulatory requirements, increased generic competition, or failure to successfully commercialize products could decrease the return shareholders receive. The cost of maintaining a public company longer than necessary may also affect that return. On the other hand, as some of the businesses develop, their value may increase, especially Evofem and LENSAR. For example, Evofem may receive FDA approval for Amphora in May and subsequently commercialize the product, both of which may increase the value of the company. With regards to LENSAR, continued progress in procedure growth and development of their next generation product may support a higher valuation for that asset.

Broad asset portfolio

PDL is a healthcare company with a broad portfolio of assets that it is now seeking to monetize. Historically, PDL focused on investing in late clinical-stage or early commercial-stage pharmaceutical assets with operations structured into four segments: income-generating assets, medical devices, strategic positions and pharmaceutical. The company was established in 1986 as a standard R&D-centered business and over the decades adjusted its strategic focus that encompassed a large royalty asset portfolio, providing alternative financing through a series of debt and royalty-backed deals and direct acquisitions of revenue-generating assets.

The medical devices segment is comprised of LENSAR, a company focused on delivering next-generation femtosecond cataract laser technology used for refractive cataract surgery. Its main asset, the LENSAR Laser System, has been approved by the FDA for anterior capsulotomy, lens fragmentation and corneal and acute incisions. The company is working on developing a state-of-the-art workstation combining a femtosecond laser and phacoemulsification (phaco) device into one platform. LENSAR is the fourth largest player in the femtosecond cataract laser market after Alcon, Johnson & Johnson and Ziemer.

The strategic positions segment was formed as a result of the securities purchase agreement with Evofem, a clinical-stage biopharmaceutical company committed to developing and commercializing innovative products to address the unmet needs in women’s sexual and reproductive health. The deal consisted of a two-tranche structure totaling a $80m investment via a private placement of securities by PDL alongside two existing Evofem shareholders, who each invested $10m. The proceeds of the investment are expected to provide funding for Evofem’s pre-commercial activities relating to Amphora, an investigational, non-hormonal, on-demand prescription contraceptive gel for women.

The pharmaceutical segment encompasses a subsidiary, Noden Pharma, used as a vehicle to acquire mature pharmaceutical products and in 2016 PDL purchased the Tekturna (Rasilez in Europe) brand of hypertension drugs (aliskiren and Tekturna HCT, a combination of aliskiren and hydrochlorothiazide) from Novartis. However, due to a patent settlement with Anchen Pharma, a generic form of aliskiren entered the US market in March 2019 and, in anticipation of this generic launch, PDL stopped promotional activities, leaving only residual value for this asset.

For the income-generating assets segment, the major component is the Assertio royalty asset, which consists of royalties and milestones related to XR formulations of the diabetes drug metformin, either alone or in combination with other diabetes drugs. Regarding other outstanding assets in this segment, there are three note receivables and five total royalty right agreements, including the Assertio royalty asset.

In September 2019, the company initiated a strategic and financial review to evaluate the business regarding capital allocation and how PDL should proceed. The options considered were whether PDL should return additional capital to shareholders, focus capital on existing investments, or concentrate on making additional investments. After completing the review, PDL decided in December 2019 to cease additional strategic investments and monetize its assets, returning net proceeds to shareholders likely in the form of additional stock repurchase programs and/or dividends.

LENSAR: Next-generation technology

LENSAR is a company focused on delivering next-generation femtosecond cataract laser technology used for refractive cataract surgery. Cataract surgery is a procedure to remove the lens of a patient’s eye after it has developed a cataract (significant lens opacification) and, in most cases, replace it with an artificial lens. It is the most common procedure performed by ophthalmic surgeons with 30 million projected surgeries worldwide by 2020.1 Moreover, cataracts are associated with old age and prevalence will only increase with the growing ageing population. Femtosecond cataract surgery uses advanced imaging and laser technology to customize planning and treatments aiming to decrease recovery time and improve outcomes, compared to conventional techniques such as extracapsular cataract extraction with standard phaco.

Uy HS, Edwards K and Curtis N (2012) Femtosecond phacoemulsification: The business and the medicine. Curr Opin Ophthalmol 23, 33–39

The LENSAR Laser System is a femtosecond cataract laser built specifically for refractive cataract surgery and was approved by the FDA for anterior capsulotomy, lens fragmentation and corneal and acute incisions. The cataract surgery space is very competitive where systems cost about $400,000 per machine and LENSAR estimates to have captured 13% of revenue market share relating to the femtosecond cataract laser (Exhibit 1). Importantly, procedure volume grew around 30% over the first nine months of last year and the company expects to have finished 2019 with 107,000 procedures performed using its technology (Exhibit 2).

Exhibit 1: Revenue market share in the femtosecond laser market

Exhibit 2: LENSAR procedures per year

Source: PDL, Market Scope

Source: PDL, Market Scope. Note: Product launch July 2012.

Exhibit 1: Revenue market share in the femtosecond laser market

Source: PDL, Market Scope

Exhibit 2: LENSAR procedures per year

Source: PDL, Market Scope. Note: Product launch July 2012.

Streamline IV: Latest LENSAR machine

LENSAR’s most recent femtosecond laser machine is the Streamline IV, which enables surgeons to treat cataracts and better manage astigmatism as a high percentage of patients with cataracts also have this condition. A study conducted by Ferrer-Blasco et al. found that of the 4,540 eyes of 2,415 patients assessed, 34.8% had a corneal astigmatism equal to or higher than 1.00 diopter (D).2 For reference, eyes with an astigmatism of less than 0.6D are considered normal, 0.7D to 2.0D is considered a small degree of astigmatism, 2.1D to 4D is a moderate astigmatism and above 4.1D is significant. Simply treating a cataract may improve a patient’s vision, however, if an underlying astigmatism could be simultaneously treated during cataract surgery, resultant vision could be meaningfully clearer (Exhibit 3).

Ferrer-Blasco T, Montés-Micó R, Peixoto-de-Matos SC, González-Méijome JM and Cerviño A. (2009) Prevalence of corneal astigmatism before cataract surgery. J Cataract Refractive Surg 35(1), 70–75. 

Exhibit 3: Comparison of post-cataract surgery vision with and without astigmatism

Source: LENSAR investor presentation

LENSAR claims the use of Streamline IV provides a higher degree of precision, reproducibility and relatively quick adjustments for cyclorotation. Cyclorotation is the rotational movement of the eye caused as patients go from sitting up to lying flat for the surgery where some measurements taken pre-operatively, as a patient is sitting up, could become misaligned. Additionally, the Streamline IV can seamlessly import data from various topographers used in the pre-operative appointment and will automatically adjust measurements to overcome parallax, where a lens appears to be aligned from one angle of view but not another making it difficult for the surgeon to discern if an intraocular lens is positioned correctly. As patients become better educated about the degree of vision correction they could achieve following femtosecond laser assisted cataract surgery where the astigmatism was also treated (potentially in a more precise fashion), doctors may move toward these types of treatment options that allow for such customization.

GEN2 workstation: Best of both worlds

LENSAR is developing its second-generation (GEN2) system that will combine both a femtosecond laser and phaco machine into a single platform. The workstation would be an all-in-one device capable of handling most cataract cases (both conventional phaco only and femtosecond laser cataract procedures that still require the use of some phaco), allowing the surgeon to seamlessly switch between the two capabilities without disruption to the procedure flow. GEN2 will also be designed to have a small footprint so it can easily fit into any operating room because reimbursement pressure is pushing surgeons to cut costs by moving to in-office surgical suites or alternative outpatient facilities versus a conventional hospital setting. LENSAR also aims to make GEN2 accessible and economical for surgeons at all stages of their practice development by offering multiple business models, such as an outright purchase with a per-procedure fee or lease with a per-procedure fee.

LENSAR completed its first GEN2 laser engine breadboard (a base for prototyping electronics) in July 2019 and is exploring options to reduce potential manufacturing costs. The second optics breadboard was completed in October 2019 and the company cited testing was satisfactory and still ongoing. The software and hardware prototypes are expected to be completed in Q220, with a targeted 510(k) submission at the end of 2021 and commercial launch in 2022.

LENSAR reported product revenue of $8.1m in Q319, up 22% compared to Q318 and up 9% sequentially, with most of the growth attributed to the Asian market. Gross margin for LENSAR increased from 34% to 41% (from Q219 to Q319), although the Q319 quarterly loss for LENSAR was $3.3m, which is higher than the quarterly loss of $1.7m in Q219 and the $0.9m loss in Q318. The loss was due to a one-time cash payment of $3.5m for intellectual property to a third party, which was booked as R&D. This was related to the development of a GEN2 LENSAR system that would integrate the laser system with a phaco system, which would lead to a device that would be able to perform all aspects of cataract surgery.

Evofem: Strategic positioning for PDL

Evofem is a clinical-stage biopharmaceutical company committed to developing and commercializing innovative products to address the unmet needs in women’s sexual and reproductive health. In June 2019, PDL completed a two-tranche securities agreement with Evofem for an aggregate $80m strategic financing alongside two existing Evofem investors, in which PDL invested $60m and existing shareholders invested $20m collectively. As of September 2019, PDL owns 29% of Evofem.

According to the Centers for Disease Control and Prevention (CDC), in the United States 61.7% of the 60.9 million women aged 15–44 use contraception and almost half of those either use short- or long-acting hormonal oral contraceptive pills or devices, such as a ring or patch (Exhibit 4). EvaluatePharma reported hormonal contraceptive sales of $6.5bn in 2018 and, importantly, many of the products still have meaningful sales despite having been on the market for two to three decades in addition to being off patent (Exhibit 5). Importantly, while generics exist, brand power is important in this market.

Exhibit 4: Contraception method share in women aged 15–44

Source: CDC, National Center for Health Statistics, Data Brief number 173, December 2014

Despite the popularity of hormonal contraceptives, they are associated with some potential severe side effects. The risk of venous thromboembolism, the formation of a blood clot in a deep vein, increases three to six times and the risk of a heart attack or stroke goes up two to three times.3 Also, certain women are contraindicated from receiving hormonal therapy, such as smokers over the age of 35 and women with a history of breast or pelvic cancers. Hence, a safe and effective hormonal alternative is expected to attract a market of women who will switch from hormone-based therapies and those not using any contraception.

  Gorenoi et al. Benefits and risks of hormonal contraception in women. German Medical Science Health Technology Assessment 2007, Vol. 3

Exhibit 5: Select marketed hormonal contraceptive products

Product

Generic name

Company

Launch year

Patent expiry

2018 sales ($m)

Mirena

Levonorgestrel

Bayer

1990

Dec 2015

1,350

Nexplanon

Etonogestrel

Merck & Co

1998

Sep 2009

703

Lo Loestrin FE

Ethinyl estradiol; ferrous fumarate; norethindrone acetate

Allergan

2011

Feb 2029

528

Yasmin

Drospirenone; ethinyl estradiol

Bayer

2000

May 2008

755

NuvaRing (vaginal ring)

Ethinyl estradiol; etonogestrel

Merck & Co

2002

Apr 2018

902

Source: EvaluatePharma

Amphora: A hormone-free contraceptive alternative

Evofem is developing its first product candidate, Amphora, from their proprietary Multipurpose Vaginal pH Regulator platform. Amphora is a bioadhesive vaginal gel that is a mix of L-lactic acid, citric acid, and potassium bitartrate that are all compounds generally regarded as safe by the FDA and frequently found in food. A normal vaginal pH is acidic at 3.5–4.5 and the gel works by maintaining acidity in the presence of semen, keeping the environment inhospitable to sperm motility. Unlike much of the competition, Amphora is non-hormonal and accordingly does not appear to have the same long-term safety concerns compared to hormone-based contraceptives.

In 2014, two large Phase III trials demonstrated Amphora’s efficacy in which the company reported that the 3,389 patient AMP001 trial met the primary endpoint of non-inferiority to Conceptrol, a spermicidal gel. In the modified ‘intent to treat’ analysis, the cumulative pregnancy percentage was 10.5% in the Amphora arm and 10.0% in the Conceptrol arm. For the ‘perfect use’ population, defined as those who used their assigned product for every sexual episode, the pregnancy percentage was 4.1% in the Amphora arm compared to 4.2% with Conceptrol. Importantly, Amphora demonstrated a benign safety profile with fewer than 2% of women withdrawing due to an adverse event, a slightly lower rate than with Conceptrol.

The FDA had issues with some of the data pertaining to 20% of study participants in Russia, which the agency viewed as ‘not generalizable’ to the US population and requested a confirmatory trial. In response to the request, Evofem initiated the confirmatory AMPOWER trial to be conducted exclusively in the US with a pre-specified hurdle of a seven-cycle cumulative pregnancy probability of 14% with the upper limit of the confidence interval at 21%. In December 2018, Evofem announced the results of the Phase III AMPOWER clinical trial, which met the pre-specified primary endpoint. The trial assessed the efficacy, safety and subject satisfaction of approximately 1,400 healthy women aged 18–35 years at 112 centers in the US. Top-line data demonstrated the cumulative probability of pregnancy over seven cycles was 13.7% with the upper limit of the confidence interval at 17.4%.

The company also released additional data from the trial indicating Amphora appeared to improve sexual satisfaction for almost 50% of participants (see Exhibit 6). At baseline, only around 17% of participants had indicated any improvement in sexual satisfaction relating to their most recent contraceptive method, which presents an opportunity for Amphora to provide a potential benefit. Although these data are exploratory and from an uncontrolled trial, the satisfaction factor may help provide a marketing edge in a large, competitive market.

Exhibit 6: Exploratory Amphora sexual satisfaction endpoint data

Visit 3 (%)

Visit 4 (%)

Visit 5 (%)

A lot better than before

16.1

19.9

22.2

A little better than before

28.4

27.4

25

No different

51

47.9

46.4

A little worse than before

4.4

4.3

5.3

A lot worse than before

0.2

0.6

1.1

Source: Evofem; Note: Responses were to the question ‘what impact did the study contraception have on your sex life since the last study visit?’.

Next steps for Amphora

Following completion of the confirmatory trial and positive top-line data, Evofem resubmitted its NDA in November 2019, which includes full results from the Phase 3 AMPOWER study. The FDA acknowledged receipt of the NDA and assigned a PDUFA date of 25 May 2020, by which time it is expected a decision will be made.

Evofem is also looking to expand the Amphora label to include the prevention of infection of Chlamydia trachomatis (chlamydia) and Neisseria gonorrhea (gonorrhea) in women. In December 2019, the company reported positive and statistically significant data from its AMPREVENCE study. The Phase IIb trial assessed 860 patients over a four-month period and found that the use of Amphora led to a 50% relative risk reduction in chlamydia infection and a 78% reduction in gonorrhea (see Exhibit 7). Evofem will discuss the data with the FDA at an end-of-Phase II meeting and expects to initiate the Phase III program in Q121 with approval in 2022.

Exhibit 7: AMPREVENCE Phase IIb efficacy data

Infection type

Number infected – Amphora arm

Number infected – Placebo arm

P value

Chlamydia

14 out of 288 patients (4.9%)

28 out of 287 patients (9.8%)

p=0.024

Gonorrhea

2 out of 280 patients (0.7%)

9 out of 277 patients (3.2%)

p=0.03

Source: Evofem

According to the CDC, there were 1.8m new cases of chlamydia in 2018, up 19% over 2014, and over 583,000 new cases of gonorrhea in that same year, up 63% over 2014. While the addressable market is quite large and both infections can lead to serious complications if left untreated, we believe Amphora will most likely be used to prevent both pregnancy and infection versus infection alone. As such, our forecasts factor in that infection prevention will make Amphora incrementally more attractive as a contraceptive since neither hormonal contraceptives, spermicides and intrauterine devices have been shown to decrease infection rates.

Noden Pharma: Increased generic competition

In July 2016, PDL formed Noden Pharma, a wholly-owned subsidiary to be used as a vehicle to acquire mature pharmaceutical products. Concurrent with the formation of the subsidiary, the company acquired the Tekturna (Rasilez in Europe) brand of hypertension drugs (aliskiren and Tekturna HCT, a combination of aliskiren and hydrochlorothiazide) from Novartis, which are collectively referred to as the Noden Products. The assets were acquired for up to $294m ($110m upfront, $89m on the first anniversary and $95m in milestones) and PDL has invested an additional $40m in working capital in Noden Pharma.

Tekturna was approved in 2007 for the treatment of hypertension and is unlike other marketed hypertensives because it is an inhibitor of renin. Renin is the enzyme responsible for generating angiotensin I and therefore has a critical role in regulating blood volume and vasoconstriction. Tekturna HCT is a co-formulation of the active drug in Tekturna with hydrochlorothiazide, a diuretic commonly prescribed for hypertension. Both Tekturna and Tekturna HCT demonstrated significant reduction in systolic blood pressure; however, despite the formulations’ efficacy, a clinical trial later showed a high number of kidney problems and strokes among diabetic patients, which triggered associated legal challenges and declining sales.

In June 2017, Anchen Pharmaceuticals submitted an abbreviated NDA to the FDA seeking authorization to manufacture and market a generic version of Tekturna in the US. A year later, a settlement was reached where Anchen was granted a nonexclusive, royalty-free license to manufacture and commercialize a generic version of aliskiren and, in return, Anchen agreed not to commercialize the product before 1 March 2019. In an effort to bolster profitability in anticipation of generic competition, Noden discontinued its direct sales force and later launched its own authorized generic of Tekturna in the US in March 2019, which was carried out by Prasco Laboratories. Due to the complexity in manufacturing Tekturna, PDL does not expect additional generic competitors beyond Anchen. In Q319, Noden product revenue was $12.3m compared to $17.8m in Q318 with geographic revenue split evenly between the US and rest of the world. To note, Tekturna is licensed in China but due to limited information those sales are not accounted for in our model.

Income-generating products

The income-generating assets segment consists of three notes receivables and five royalty agreements (see Exhibit 8) with the Assertio royalties the largest component of these.

Exhibit 8: Active and outstanding investments

Investment

Investment type

Assertio Therapeutics

Royalty

The Regents of the University of Michigan (U-M)

Royalty

AcelRx Pharmaceuticals

Royalty

Viscogliosi Brothers (VB)

Royalty

KYBELLA

Royalty

CareView Communications

Note (impaired)

Wellstat Diagnostics

Note (impaired)

Hyperion

Note (impaired)

Investment

Assertio Therapeutics

The Regents of the University of Michigan (U-M)

AcelRx Pharmaceuticals

Viscogliosi Brothers (VB)

KYBELLA

CareView Communications

Wellstat Diagnostics

Hyperion

Investment type

Royalty

Royalty

Royalty

Royalty

Royalty

Note (impaired)

Note (impaired)

Note (impaired)

Source: PDL

The Assertio assets

In October 2013, PDL acquired the royalty rights to five type 2 diabetes products licensed by Assertio (formerly Depomed) and in August 2018, PDL purchased all Assertio’s remaining interests in royalty and milestone payments payable on sales of the type 2 diabetes product portfolio. The portfolio encompassed royalty rights for XR formulations of the diabetes drug metformin, either alone or in combination with other diabetes drugs (see Exhibit 9).

Exhibit 9: Components of Assertio royalty assets

Product

Company

Royalty rate

Glumetza (extended release metformin)

Santarus/Salix/Valeant/Bausch Health

Gross margin split (50%)

Invokamet XR (Invokana + extended release metformin)

Jannsen

Unknown

Jentadueto XR (Tradjenta + extended release metformin)

Boehringer Ingelheim/Eli Lilly

Unknown

Synjardy XR (Jardiance + extended release metformin)

Boehringer Ingelheim/Eli Lilly

Unknown

Extended release metformin in Korea and Canada

LG Life Sciences and Valeant/Baucsh Health

Unknown

Source: PDL, Bloomberg

The largest revenue stream was Glumetza, an XR metformin marketed by Valeant, with a royalty on net sales of 32% in 2013 and 2014 and 34.5% in 2015. The drug went off patent in February 2016, which triggered a provision to adjust the royalty rate to 50% of gross profits (estimated at an effective royalty rate of 45%), compared to 32–34.5% of sales previously. Consensus estimates for 2019 sales of Glumetza amount to around $141m, according to EvaluatePharma. However, at the Evercore conference in December 2019 the CEO of Bausch Health, the company that markets Glumetza, indicated Glumetza sales would be about half of the quarterly level of the first three quarters (which had been around $40m) and would continue to trail down although ‘not markedly’. The reasons for this are unclear but likely in part due to price competition as well as increased discounting in the channel.

The royalties also included a series of other metformin-containing medicines that produced royalty streams on a smaller scale than Glumetza (generally estimated at low single digits), but provided some income supplementation once Glumetza went off patent, although with far less visibility due to the level of reporting from the partnered companies.

Other outstanding transactions

PDL initially entered into a hybrid royalty/debt transaction for $44m in November 2012, which comprised of the right to receive quarterly interest payments of 5% per year from the Wohlstadter family (equity owners of Wellstat Diagnostics) and a low double-digit royalty on commercialization of Wellstat’s products. This structure replaced two earlier debt facilities, which were repaid with the proceeds of the larger transaction. In 2013, Wellstat breached the loan agreement, which triggered several legal actions between PDL and the Wohlstadters. As a result, the loan has been determined as impaired and has not accrued interest since April 2014. In September 2019, a summary judgment decision was made in favor of PDL and the court ordered a damages inquest to assess the amount owed by Wellstat. PDL expects to recover the full amount due including principal, accumulated interest, further advances and fees.

PDL executed a royalty transaction in June 2014 with Viscogliosi Brothers (VB), a venture capital/private equity and merchant banking firm, and acquired all royalties payable for sales on Coflex, an interlaminar stabilization device for patients with spinal stenosis. The product received pre-market approval from the FDA in June 2018, making it the first approved disposable instrument set for a Class III spinal device. The product was commercialized by Paradigm Spine, which was later acquired by RTI Surgical Holdings in March 2019.

In November 2014, PDL acquired the royalty interest from the Regents of the University of Michigan (U-M) for Cerdelga (eliglustat), an oral therapy for adult patients with Gaucher disease type 1. Under the agreement, PDL is entitled to 75% of all royalty payments of U-M’s worldwide royalty interest (low single digit) in Cerdelga due under the license agreement with Genzyme Corporation. The FDA approved Cerdelga in 2014 as the only first-line oral therapy for Gaucher disease type 1 because the standard treatment is an enzyme replacement therapy which patients receive via intravenous infusions for life. In Q319, Sanofi reported Cerdelga quarterly sales increased 26.8% to €53m ($59m) with total sales of €147m ($164m) for the first nine months citing increased product penetration in Europe and the US.

PDL entered into a royalty rights transaction in September 2015 for Zalviso, an approved drug/device combination product that dispenses a sublingual formulation of sufentanil used to treat moderate to severe post-operative pain in a hospital setting for up to 72 hours. The product is meant to be used instead of intravenous patient-controlled analgesia. In the agreement, PDL was to receive 75% of all royalty payments (double digit) and 80% of the first four commercial milestone payments due under AcelRx’s license agreement with Grünenthal, the commercial partner in the EU, Switzerland and Australia. In Q219, PDL noted a discrepancy between the company’s forecasted versus reported results for Zalviso as royalties were not tracking in line for that quarter, so a third party was enlisted to re-assess the market and expectations. The analysis revealed several factors that contributed to slower than expected adoption of the product including a smaller target market than was initially forecast, a higher price which limited switching from alternative therapies and restricted product use in patients with shorter recovery time due to a three-day pre-filled cassette (much of the product would be unused and wasted in these patients). As a result, PDL decided to take a $60m write down on the product in Q219.

In October 2015, PDL provided CareView, an information technology provider to the healthcare industry, with loans comprised of two tranches of $20m each contingent on CareView attaining certain milestones. One tranche of $20m was funded with a five-year maturity and quarterly interest payments of 13.5% in arrears; however, the second tranche was not funded since CareView failed to achieve the related funding milestones.

PDL entered into a royalty transaction in July 2016 and acquired the rights to receive certain royalties on sales of Kybella, which is marketed by Allergan. Also, on reaching certain product sales targets, PDL could potentially receive payments of up to $1m. Kybella was approved by the FDA for the treatment of adults with moderate-to-severe deposits of fat below the chin. In Q319, Allergan reported Kybella total quarterly sales of $5.6m and for the nine months ended 30 September 2019 total sales were $23.6m.

Sensitivities

Following PDL’s most recent strategy shift to cease all strategic investments and monetize assets, the company will be faced with a relatively lengthy process since its asset portfolio is not focused on any one area within healthcare. PDL estimates this divestiture process will take two to three years or longer and will be dependent on several factors including interested parties’ valuation of assets versus book value and the team’s overall ability to execute the transaction. The longer the monetization process takes, the more likely it is that factors such as patent expiration, changes in regulatory requirements, increased generic competition, or failure to successfully commercialize products could decrease the return shareholders receive. The cost of maintaining a public company longer than necessary may also affect that return.

Evofem resubmitted its NDA for its Amphora product and awaits the FDA’s response, which is expected in Q220. Assuming approval is granted, there remains a risk that the Evofem team will not execute the commercialization strategy, which will be critical since the contraceptive market is highly competitive and largely controlled by multi-billion dollar companies with highly liquid balance sheets. There is also the chance that Evofem may need additional financing in the future and PDL will need to assess whether providing part of this financing will be in its shareholders’ best interests. However, if Evofem receives approval from the FDA and successfully commercializes its Amphora product, the value of the company may increase dramatically.

While LENSAR does have a product on the market, widespread adoption of femtosecond ophthalmic lasers is still a work in progress. The company is also developing a prototype for its GEN2 workstation, which can present its own engineering hurdles in addition to still needing to submit a 510(k)-application, pending FDA clearance. However, LENSAR is the fourth largest player in the market and it continues to develop its next-generation femtosecond cataract lasers.

Valuation: $713m or $5.73 per share

Using an NPV model that values each revenue stream, we value PDL at $713m or $5.73 per basic share, down from $767m or $6.17 per share. This reduction was mainly attributable to adjusting the value of the Assertio royalty stream following recent comments made by the CEO of Bausch Health on the expectations for the sales of Glumetza, a major component of that royalty stream. We value the Assertio royalty stream, the equity stake in Evofem and PDL’s wholly owned subsidiary LENSAR as its most valuable assets. We have not made any changes based on the announced shift in company strategy but will do so as asset sales occur.

Exhibit 10: PDL valuation table

Royalty/note

Type

Expiration year

PDL balance sheet carrying value ($m)

NPV ($m)

Assertio (formerly Depomed)

Royalty on Glumetza and other products

2024

265.0

216.7

VB

Royalty on spine implant

Undisclosed

14.5

14.7

University of Michigan

Royalty on Cerdelga

2022

21.2

12.8

Wellstat

Note (impaired)

Unknown

50.2

50.2

Hyperion

Note (impaired)

Unknown

1.2

1.2

LENSAR

Equity

N/A

65.2

AcelRx

Royalty on Zalviso

2027

12.7

10.8

CareView

Note (impaired)

2022

11.5

11.5

Noden

Equity

N/A

34.8

14.4

Kybella

Royalty

Unknown

0.6

0.7

Evofem

Equity

N/A

67.2

153.2

Total

 

 

 

551

Net cash (Q319 + debt transaction and stock buyback) ($m)

161.3

Total firm value ($m)

713

Total basic shares (m)

124.4

Value per basic share ($)

5.73

Total options (m)

0.0

Total number of shares (m)

124.4

Diluted value per share ($)

5.73

Source: Edison Investment Research

Financials

PDL ended Q319 with $294.3m in cash and $150m in principal owed in the form of convertible debt. In December, the company initiated a $275m (upsized from $200m) share and convertible note repurchase program to return value to shareholders. Subsequent to that announcement, the company repurchased $119.3m in debt in exchange for $98m in cash and 13.4m share of common stock and now has $30.7m in debt outstanding ($19.2m in debt due in December 2021 and $11.5m in debt due December 2024).

Following the changes in expectation for Glumetza, as communicated by Bausch Health, we have lowered our 2020 revenue estimate from $124.8m to $115.3m. Note that we are not factoring in any additional write-down of the Assertio asset and if that occurs, our estimates would need to be reduced further (on a non-cash basis).

We continue to believe PDL has enough capital to execute on the remainder of the repurchase program and will be able to initiate additional repurchase programs (or dividends) once assets are monetized successfully.

Exhibit 11: Financial summary

$000s

2017

2018

2019e

2020e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

320,060

198,110

102,641

115,251

Cost of Sales

(30,537)

(48,460)

(52,540)

(53,106)

Gross Profit

289,523

149,650

50,102

62,146

General & Administrative

(63,324)

(62,559)

(53,494)

(55,634)

EBITDA

 

 

218,818

84,136

(10,343)

2,985

Operating Profit (before amort. and except.)

 

 

218,818

84,136

(10,343)

2,985

Intangible Amortisation

(24,689)

(15,831)

(6,320)

(6,320)

Other

0

0

0

0

Exceptionals

(349)

(118,899)

0

0

Operating Profit

193,780

(50,594)

(16,663)

(3,335)

Net Interest

(18,562)

(5,328)

(5,517)

4,636

Other

9,309

0

17,685

0

Profit Before Tax (norm)

 

 

200,256

78,808

(15,860)

7,621

Profit Before Tax (FRS 3)

 

 

184,527

(55,922)

(4,495)

1,301

Tax

(73,826)

(12,937)

(3,117)

(273)

Deferred tax

(0)

(0)

(0)

(0)

Profit After Tax (norm)

126,430

65,871

(18,977)

7,348

Profit After Tax (FRS 3)

110,701

(68,859)

(7,612)

1,028

Minority interest

(47)

0

0

0

Profit After Tax less Minority Interest (FRS 3)

110,654

(68,859)

(7,612)

1,028

Average Number of Shares Outstanding (m)

155.4

145.7

118.8

124.4

EPS - normalised ($)

 

 

0.81

0.45

(0.16)

0.06

EPS - FRS 3 ($)

 

 

0.71

(0.47)

(0.06)

0.01

Dividend per share (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

90.5

75.5

48.8

53.9

EBITDA Margin (%)

68.4

42.5

-10.1

2.6

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

68.4

42.5

-10.1

2.6

BALANCE SHEET

Fixed Assets

 

 

602,680

446,519

427,203

383,912

Intangible Assets

215,823

51,319

47,349

47,349

Tangible Assets

7,222

7,387

6,917

8,070

Royalty rights

349,223

376,510

282,549

238,106

Other

30,412

11,303

90,388

90,388

Current Assets

 

 

640,443

517,217

320,695

380,905

Stocks

0

0

0

0

Debtors

31,183

21,648

12,581

12,581

Cash

527,266

394,590

208,076

268,286

Other

81,994

100,979

100,038

100,038

Current Liabilities

 

 

(193,109)

(52,470)

(44,139)

(44,122)

Creditors

(19,785)

(13,142)

(13,255)

(13,255)

Short term borrowings

(126,066)

0

0

0

Other

(47,258)

(39,328)

(30,884)

(30,867)

Long Term Liabilities

 

 

(204,124)

(181,487)

(85,001)

(85,001)

Long term borrowings

(117,415)

(124,644)

(30,700)

(30,700)

Other long term liabilities

(86,709)

(56,843)

(54,301)

(54,301)

Net Assets

 

 

845,890

729,779

618,758

635,695

Minority Interests

0

0

0

0

Shareholder equity

 

 

845,890

729,779

618,758

635,695

CASH FLOW

Operating Cash Flow

 

 

40,624

(13,425)

(22,696)

(8,425)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(1,297)

(4,523)

(2,545)

(1,153)

Acquisitions/disposals

128,415

57,969

84,110

69,788

Financing

0

0

0

0

Dividends

(222)

(48)

0

0

Other

212,592

(46,202)

(139,932)

0

Net Cash Flow

380,112

(6,229)

(81,063)

60,210

Opening net debt/(cash)

 

 

85,289

(283,785)

(269,946)

(177,376)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

(11,038)

(7,610)

(11,507)

(0)

Closing net debt/(cash)

 

 

(283,785)

(269,946)

(177,376)

(237,586)

Source: company reports, Edison Investment Research

Contact details

Revenue by geography

PDL BioPharma, Inc.
932 Southwood Blvd.
Incline Village, NV 89451

United States
+1 (775) 832 - 8500
www.pdl.com

Contact details

PDL BioPharma, Inc.
932 Southwood Blvd.
Incline Village, NV 89451

United States
+1 (775) 832 - 8500
www.pdl.com

Revenue by geography

Management team

President and CEO: Dominique Monnet

Vice president, business development: Jill Jene, PhD

Dominique Monnet joined PDL in September 2017 and assumed his current position in December 2018. Before joining PDL, Mr Monnet served as senior vice president and chief marketing officer of Alexion Pharmaceuticals and held various senior positions at Amgen including VP/general manager for the Inflammation Business Unit and VP/head of global marketing commercial development. Prior to Amgen, Mr Monnet spent 19 years at Schering-Plough where he held positions in line commercial management and global marketing. Mr Monnet earned a business degree from EDHEC Business School and an MBA from INSEAD.

Jill Jene joined PDL in May 2018 and brings more than 20 years of biopharmaceutical business development experience, which includes more than $3bn in licensing and M&A transactions. Prior to PDL, Ms Jene served as senior VP, business development at twoXAR. Before that, she was VP, business development at Depomed where she was instrumental in closing over 20 transactions, including the acquisition of four commercial franchises. Earlier in her career, Ms Jene held positions in business development at Cell Genesys, 3M Company and Baxter International. She holds a PhD and MS in chemistry from Northwestern University and an MBA from DePaul University.

Vice president and general counsel: Christopher Stone

Vice president and acting CFO: Ed Imbrogno, CPA

Chris Stone joined PDL in February 2009. He brings more than 25 years’ legal experience to the role. Before joining PDL, Mr Stone served as VP of legal affairs and corporate secretary at LS9, an advanced biofuels development company, where his work included a focus on intellectual property protection and licensing. Previously, he was VP of US intellectual assets at Danisco, a global producer of food ingredients, enzymes and bio-based solutions. Mr Stone received a JD from George Washington University and a BS in biochemistry from the University of Massachusetts.

Ed Imbrogno joined PDL in October 2018 and brings more than 30 years of accounting and financial reporting experience. Prior to joining PDL, Mr Imbrogno was Senior Director and Corporate Controller for BioDelivery Sciences International, a Nasdaq-listed specialty pharmaceutical company. Before that, he was VP, financial reporting for AerCap Holdings, a NYSE-listed company and director, accounting for Amgen. Mr Imbrogno began his career as an audit manager with Ernst & Young. He holds an MBA from Wake Forest University and is a licensed certified public accountant.

Management team

President and CEO: Dominique Monnet

Dominique Monnet joined PDL in September 2017 and assumed his current position in December 2018. Before joining PDL, Mr Monnet served as senior vice president and chief marketing officer of Alexion Pharmaceuticals and held various senior positions at Amgen including VP/general manager for the Inflammation Business Unit and VP/head of global marketing commercial development. Prior to Amgen, Mr Monnet spent 19 years at Schering-Plough where he held positions in line commercial management and global marketing. Mr Monnet earned a business degree from EDHEC Business School and an MBA from INSEAD.

Vice president, business development: Jill Jene, PhD

Jill Jene joined PDL in May 2018 and brings more than 20 years of biopharmaceutical business development experience, which includes more than $3bn in licensing and M&A transactions. Prior to PDL, Ms Jene served as senior VP, business development at twoXAR. Before that, she was VP, business development at Depomed where she was instrumental in closing over 20 transactions, including the acquisition of four commercial franchises. Earlier in her career, Ms Jene held positions in business development at Cell Genesys, 3M Company and Baxter International. She holds a PhD and MS in chemistry from Northwestern University and an MBA from DePaul University.

Vice president and general counsel: Christopher Stone

Chris Stone joined PDL in February 2009. He brings more than 25 years’ legal experience to the role. Before joining PDL, Mr Stone served as VP of legal affairs and corporate secretary at LS9, an advanced biofuels development company, where his work included a focus on intellectual property protection and licensing. Previously, he was VP of US intellectual assets at Danisco, a global producer of food ingredients, enzymes and bio-based solutions. Mr Stone received a JD from George Washington University and a BS in biochemistry from the University of Massachusetts.

Vice president and acting CFO: Ed Imbrogno, CPA

Ed Imbrogno joined PDL in October 2018 and brings more than 30 years of accounting and financial reporting experience. Prior to joining PDL, Mr Imbrogno was Senior Director and Corporate Controller for BioDelivery Sciences International, a Nasdaq-listed specialty pharmaceutical company. Before that, he was VP, financial reporting for AerCap Holdings, a NYSE-listed company and director, accounting for Amgen. Mr Imbrogno began his career as an audit manager with Ernst & Young. He holds an MBA from Wake Forest University and is a licensed certified public accountant.

Principal shareholders

(%)

BlackRock Inc

9.71

Dimensional Fund Advisors

8.94

Renaissance Technologies

8.2

The Vanguard Group

5.47

Engine Capital Management

5.28

Companies named in this report

Abbott Laboratories (ABT); AbbVie (ABBV); Allergan (AGN); Bausch Health Companies (BHC); Bayer (BAYZF); Eli Lilly (LLY); Merck & Co (MRK); Novartis (NVS); Sun Pharmaceuticals (SUNPHARMA.NS); Teva Pharmaceutical (TEVA)


General disclaimer and copyright

This report has been commissioned by PDL BioPharma and prepared and issued by Edison, in consideration of a fee payable by PDL BioPharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by PDL BioPharma and prepared and issued by Edison, in consideration of a fee payable by PDL BioPharma. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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