PDL BioPharma |
Seeking additional commercial products |
Financial update |
Pharma & biotech |
20 November 2017 |
Share price performance
Business description
Next events
Analysts
PDL BioPharma is a research client of Edison Investment Research Limited |
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PDL BioPharma recently reported strong Q317 earnings, mainly due to royalties related to Depomed as well as an increase in the fair value of the Depomed assets due to a settlement agreement with Valeant related to underpayment. In addition, PDL made public its attempt to acquire Neos Therapeutics, an attention deficit hyperactivity disorder (ADHD) focused specialty pharmaceutical company, for $10.25 per share (approximately $300m based on the latest share count). Neos declined the offer, which expired on 8 November. PDL has expressed that it believes this is a fair offer and has not indicated that it will increase it.
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
590.4 |
530.1 |
2.04 |
0.60 |
1.4 |
21.1 |
12/16 |
244.3 |
175.5 |
0.78 |
0.10 |
3.6 |
3.5 |
12/17e |
295.2 |
189.5 |
0.77 |
0.00 |
3.7 |
N/A |
12/18e |
104.2 |
6.4 |
0.09 |
0.00 |
31.6 |
N/A |
Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.
Neos buyout bid
On 26 October 2017, PDL made a hostile bid at $10.25 per share in cash for the acquisition of Neos Therapeutics (~40% premium to the stock price at the time), which currently markets two products in the US for ADHD (both are extended release oral disintegrated tablet versions of the current standards of care for ADHD) and will launch a third product early in 2018. The offer expired on 8 November and next steps are unclear.
Cash boost from kaléo note sale
In September, PDL sold its entire interest in the kaléo note for $141.7m, which included a small premium on the principal and accrued interest. This may have been done to improve its cash balance as it attempted to acquire Neos as well as to allow flexibility for future potential transactions.
New share repurchase program
In September, PDL announced a $25m share repurchase program that will run through September 2018. Previously, it had announced a $30m share repurchase program in March 2017, which it completed the following June. With a book value approximately double the stock price ($5.40 as of the end of Q317), share repurchases are strongly earnings accretive.
Valuation: $796m or $5.16 per share
Our valuation has increased slightly from $793m or $5.15 per share to $796m or $5.16 per share. This was mainly due to a higher cash balance and a higher value for Noden as we rolled forward NPVs. This was mitigated by a lower value for Lensar as we have increased our expense estimates for this year as well as the sale of the kaléo note.
Quarterly update
PDL recently reported results for Q3 and provided an update on numerous assets. Revenue from the change in fair value of royalty rights was $35.4m thanks to continued strength in the Depomed royalty franchise. In addition, Valeant recently settled a lawsuit brought by Depomed and PDL due to suspected underpayment of royalties related to Glumetza. Under the terms of the settlement, PDL received $13m. While the cash was received in November, PDL accounted for it as part of the fair value of the Depomed assets in Q3, boosting results.
With regards to Noden, net revenue for the quarter was $15.1m ($11.5m in the US and $3.6m internationally; as a reminder, PDL books revenue outside the US net of cost of goods as well as a separate fee to Novartis). This was down 6.8% from the $16.2m in revenues ($12.9m in the US and $3.3m internationally) reported in Q217. In August, the company significantly increased the size of the dedicated contract salesforce from around 40 sales representatives and four district managers to around 60 sales representatives and six district managers. It is still too early to tell if they are having a positive impact. Internationally, in November commercialization of Tekturna/Rasilez was transferred to the company from Novartis in Switzerland and the EU. The company expects to focus on selling in profitable countries and recently discontinued marketing in France, where the product was not making money. The company is also seeking licensing or distribution in China and Japan where marketing authorizations should transfer over in 2018.
For LENSAR, Q317 was the first full quarter that it was consolidated in PDL’s financial statements. Revenue for the quarter was $5.0m. Last quarter, PDL had only reported a partial quarter (11 May to 30 June) for LENSAR and revenues were $2.6m. Expenses appear to be up at a higher rate than revenues as the reported loss for LENSAR increased to $5.6m from $1.2m last quarter.
Unfortunately, the Queen et al. royalty stream appears to be finally petering out. PDL only recognized $1.4m in the quarter compared to $16.3m in the previous quarter as product manufactured after the expiration of the patents (December 2014) is not subject to the royalty. Biogen has notified PDL that it expects to pay $4.5m in royalties in Q4 and reduced royalties afterward.
Finally, with regards to the note agreements, in September PDL sold its entire interest in the kaléo note for $141.7m, which included a small premium on the principal and accrued interest. Company management has not stated their reasoning for selling the kaléo note, which had an attractive 13% interest rate. It may have been sold to improve the cash balance as they attempted to acquire Neos as well as to allow them flexibility for future potential transactions.
Third time not the charm with Neos
On 26 October 2017, PDL publicly announced a $10.25 per share takeover bid for Neos Therapeutics. Neos is a pharmaceutical company with an ADHD-focused portfolio with two commercialized products, Adzenys XR-ODT (amphetamine) and Cotempla XR-ODT (methylphenidate), which launched in May 2016 and October 2017, respectively, and a third FDA-approved product, Adzenys ER (amphetamine) extended-release oral suspension, which was approved in September 2017 and is expected to launch in early 2018. The company’s propriety extended-release (XR) orally disintegrating tablet (ODT) and XR-oral suspension technologies serve as the foundation for its portfolio and pipeline. Neos’s XR-ODT and XR-oral suspension products are developed, manufactured, and commercialized in-house. This buyout offer marks PDL’s third attempt to acquire the ADHD-focused pharmaceutical company (the previous two undisclosed attempts occurred this summer). Neos has declined this offer as well and the offer expired on 8 November. PDL has expressed that it believes the offer to be fair and has not indicated that it will increase it. The next steps with regards to Neos are unclear, but PDL continues to seek additional commercial products to acquire.
Valuation
Our valuation has increased slightly from $793m or $5.15 per share to $796m or $5.16 per share. This was the result of a few adjustments related to its investments/segments as well as a higher cash balance. We increased the value of Noden from $53.4m to $59.8m, mainly due to rolling forward NPVs, which increased the valuation as certain acquisition costs (i.e. the anniversary payment for Noden) are now behind the company, though this was mitigated by a slight decrease in our revenue assumptions and higher SG&A assumptions. We also reduced the value of LENSAR from $54.6m to $50.1m as we increased its operating expense assumptions for 2017. The sale of the kaléo note was a net negative NPV event as we valued it at $153.6m while it was sold for $141.7m.
Exhibit 1: PDL valuation table
Royalty/note |
Type |
Expiration year |
PDL balance sheet carrying value ($m) |
NPV |
|
Queen et al |
Royalty |
2015 |
N/A |
N/A |
|
Depomed |
Royalty on Glumetza & other products |
2024 |
$222.7 |
$231.3 |
|
VB |
Royalty on Spine Implant |
Undisclosed |
$15.4 |
$17.7 |
|
University of Michigan |
Royalty on Cerdelga |
2022 |
$35.4 |
$12.7 |
|
Wellstat |
Note (Impaired) |
Unknown |
$50.2 |
$50.2 |
|
Hyperion |
Note (Impaired) |
Unknown |
$1.2 |
$1.2 |
|
Avinger |
Royalty |
2018 |
$0.9 |
$0.8 |
|
Lensar |
Equity |
N/A |
$50.1 |
||
AcelRx |
Royalty on Zalviso |
2027 |
$74.1 |
$72.5 |
|
CareView |
Note |
2022 |
$19.2 |
$20.6 |
|
Noden |
Equity |
N/A |
N/A |
$59.8 |
|
Kybella |
Royalty |
Unknown |
$3.6 |
$1.7 |
|
Total |
|
|
|
$519 |
|
Net cash (Q317) ($m) |
$277.3 |
||||
Total firm value ($m) |
$796 |
||||
Total basic shares (m) |
154.3 |
||||
Value per basic share ($) |
$5.16 |
||||
Total options (m) |
1.2 |
||||
Total number of shares (m) |
155.5 |
||||
Diluted value per share ($) |
$5.12 |
||||
Source: Edison Investment Research
Financials
PDL reported revenue of $62.7m in Q317, which was higher than our $38m estimate (due to higher than expected Glumetza royalties and the Valeant settlement) but down from $143.8m last quarter, as Q217 included a $54.2m jump in the fair value of the Depomed assets, increased royalties from the launch of an authorized generic of Glumetza, a one-time lump-sum payment of $19.5m from Merck in a patent settlement and $14.9m higher Tysabri royalties. We have increased our estimated 2017 revenues from $264.2m to $295.2m due to the higher than expected Q317 revenues as well as the inclusion of $4.5m in Tysabri royalties. However, we have lowered our 2018 revenue estimates from $122.2m to $104.2m, mainly due to the loss of interest revenue related to the kaléo note. R&D and SG&A spending totaled $17.6m in Q317, down from $19.2m in Q217, mainly due to a reduction in R&D spending as pediatric trials for Tekturna were completed though this was partially offset by higher SG&A spending (which we have increased by $3.8m for 2017 and by $6.6m for 2018). The company ended the quarter with $510.1m in cash and $6.4m in short-term investments.
In September, PDL announced a $25m share repurchase program, which will run through September 2018. Previously, it had announced a $30m share repurchase program in March 2017, which it completed the following June. With a book value approximately double the stock price, share repurchases are strongly earnings accretive.
Exhibit 2: Financial summary
$000s |
2015 |
2016 |
2017e |
2018e |
||
Year end 31 December |
US GAAP |
US GAAP |
US GAAP |
US GAAP |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
590,448 |
244,301 |
295,189 |
104,209 |
Cost of Sales |
0 |
(4,065) |
(15,330) |
(9,396) |
||
Gross Profit |
590,448 |
240,236 |
279,858 |
94,813 |
||
General & Administrative |
(36,090) |
(43,287) |
(63,848) |
(67,388) |
||
EBITDA |
|
|
550,379 |
193,129 |
208,753 |
23,797 |
Operating Profit (before amort. and except). |
550,379 |
193,129 |
208,753 |
23,797 |
||
Intangible Amortization |
0 |
(12,028) |
(24,452) |
(24,452) |
||
Other |
(3,979) |
0 |
0 |
0 |
||
Exceptionals |
0 |
(51,699) |
(3,349) |
0 |
||
Operating Profit |
550,379 |
129,402 |
180,952 |
(655) |
||
Net Interest |
(26,691) |
(17,679) |
(19,209) |
(17,419) |
||
Other |
6,450 |
(2,353) |
3,995 |
0 |
||
Profit Before Tax (norm) |
|
|
530,138 |
175,450 |
189,544 |
6,377 |
Profit Before Tax (FRS 3) |
|
|
530,138 |
109,370 |
165,738 |
(18,075) |
Tax |
(197,343) |
(45,711) |
(70,179) |
7,411 |
||
Deferred tax |
(0) |
(0) |
(0) |
(0) |
||
Profit After Tax (norm) |
332,795 |
129,739 |
119,365 |
13,788 |
||
Profit After Tax (FRS 3) |
332,795 |
63,659 |
95,559 |
(10,664) |
||
Minority interest |
0 |
(53) |
(47) |
(47) |
||
Profit After Tax less Minority Interest (FRS 3) |
332,795 |
63,606 |
95,512 |
(10,711) |
||
Average Number of Shares Outstanding (m) |
163.4 |
163.8 |
155.5 |
157.0 |
||
EPS - normalised ($) |
|
|
2.04 |
0.78 |
0.77 |
0.09 |
EPS - FRS 3 ($) |
|
|
2.04 |
0.39 |
0.61 |
(0.07) |
Dividend per share ($) |
0.60 |
0.10 |
0.00 |
0.00 |
||
Gross Margin (%) |
100.0 |
98.3 |
94.8 |
91.0 |
||
EBITDA Margin (%) |
93.2 |
79.1 |
70.7 |
22.8 |
||
Operating Margin (before GW and except.) (%) |
93.2 |
79.1 |
70.7 |
22.8 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
733,468 |
818,949 |
583,810 |
512,183 |
Intangible Assets |
0 |
228,542 |
216,060 |
191,608 |
||
Tangible Assets |
31 |
1,631 |
20,346 |
12,038 |
||
Royalty rights |
399,204 |
402,318 |
318,969 |
280,102 |
||
Other |
334,233 |
186,458 |
28,435 |
28,435 |
||
Current Assets |
|
|
279,731 |
395,147 |
651,462 |
583,640 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
0 |
40,120 |
17,465 |
17,465 |
||
Cash |
218,883 |
147,154 |
560,533 |
492,711 |
||
Other |
60,848 |
207,873 |
73,464 |
73,464 |
||
Current Liabilities |
|
|
(36,662) |
(130,315) |
(194,132) |
(69,210) |
Creditors |
(394) |
(7,016) |
(10,448) |
(10,448) |
||
Short term borrowings |
(24,966) |
0 |
(124,922) |
0 |
||
Other |
(11,302) |
(123,299) |
(58,762) |
(58,762) |
||
Long Term Liabilities |
|
|
(283,485) |
(329,649) |
(207,060) |
(207,060) |
Long term borrowings |
(232,835) |
(232,443) |
(116,052) |
(116,052) |
||
Other long term liabilities |
(50,650) |
(97,206) |
(91,008) |
(91,008) |
||
Net Assets |
|
|
693,052 |
754,132 |
834,080 |
819,553 |
Minority Interests |
0 |
0 |
0 |
0 |
||
Shareholder equity |
|
|
693,052 |
754,132 |
834,080 |
819,553 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
301,465 |
101,718 |
55,010 |
(18,152) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(9) |
(109,963) |
(1,160) |
(1,042) |
||
Acquisitions/disposals |
(71,593) |
13,082 |
148,566 |
77,734 |
||
Financing |
0 |
0 |
0 |
0 |
||
Dividends |
(98,307) |
(16,583) |
(21) |
0 |
||
Other |
(8,046) |
(47,629) |
210,983 |
86 |
||
Net Cash Flow |
123,510 |
(59,375) |
413,378 |
58,625 |
||
Opening net debt/(cash) |
|
|
160,347 |
38,918 |
85,289 |
(319,559) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Exchange rate movements |
0 |
0 |
0 |
0 |
||
Other |
(2,081) |
13,004 |
(8,531) |
(1,525) |
||
Closing net debt/(cash) |
|
|
38,918 |
85,289 |
(319,559) |
(376,659) |
Source: PDL BioPharma accounts, Edison Investment Research
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