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Research: Healthcare
PDL BioPharma
Written by
PDL BioPharma |
PDL’s new investment strategy |
Pending acquisition |
Pharma & biotech |
2 June 2016 |
Share price performance
Business description
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PDL BioPharma is a research client of Edison Investment Research Limited |
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In a change of strategic direction, PDL announced in May 2016 that the company will be acquiring a majority equity stake in the newly formed Noden Pharma. Noden will use the capital along with additional funds from debt to finance the acquisition of the blood pressure drugs Tekturna and Tekturna HCT from Novartis for a total of $294m in upfronts and milestones. PDL is expected to provide $145m in return for an 88% equity stake, but is obligated to finance any shortfalls in additional planned debt financing.
Year end |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
581.2 |
501.3 |
2.04 |
0.61 |
1.7 |
17.6 |
12/15 |
590.4 |
530.1 |
2.04 |
0.60 |
1.7 |
17.6 |
12/16e |
154.5 |
97.5 |
0.37 |
0.20 |
9.4 |
5.8 |
12/17e |
69.4 |
9.3 |
0.04 |
0.20 |
86.5 |
5.8 |
Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.
A unique and effective drug
Tekturna (aliskiren) was approved in 2007 for the treatment of high blood pressure. It is unique in that it is the only currently approved renin inhibitor. Tekturna HCT is a coformulation of the active ingredient in Tekturna with the diuretic hydrochlorothiazide widely prescribed for hypertension. The two formulations showed mean reductions in systolic blood pressure of 14.8 and 21.2 mmHg respectively (compared to 13 mmHg for Monopril and 19 mmHg for Norvasc).
Sales off peak but long tail expected
Tekturna had peak sales of $557m in 2011. However, a trial in the same year showed some evidence of increased stroke and renal complication risk in diabetic patients. Sales declines have stabilized at 8.7% over the past 12 months (Symphony Health) and the drug sold $156m in 2015. We expect a long tail on sales because despite a 2018 composition of matter patent expiration there is little incentive for generic development and significant manufacturing barriers.
Deal is immediately accretive, provides a new vehicle
Tekturna would provide immediate, high-margin revenue streams to PDL and is immediately accretive. Moreover, Noden provides a new investment vehicle for the company, allowing it to diversify away from royalty and debt deals into real assets.
Valuation: Unchanged until deal close
We are not updating our valuation of PDL ($1,036m or $6.28 per basic share) until the closing of the Tekturna transaction. However, through NPV analysis, we would value PDL’s potential share of the asset at $215m. Noden’s financials would be consolidated with PDL in that event. The risks associated with the deal are that Tekturna sales could decline at a faster rate than predicted or that Noden could fail to obtain additional financing, obligating PDL to finance the entire acquisition cost.
Investment summary
PDL announced on May 24, 2016 that the company would acquire a majority equity stake (88%) in Noden Pharma. Noden Pharma is a new company formed to acquire the hypertension drugs Tekturna (aliskiren) and Tekturna HCT (aliskiren and hydrochlorothiazide) from Novartis (known as Rasilez and Rasilez HCT outside of the US). The deal is expected to close 30 days after the announcement. This is the first equity-based deal that PDL has initiated, and the first marketed drug it has been operationally involved with. Moreover, Noden may serve as a vehicle for future drug acquisitions and will provide an additional avenue for PDL to invest capital.
The drug
Tekturna was approved in 2007 for the treatment of hypertension. It is unlike any other marketed antihypertensive drugs because it is an inhibitor of renin. Renin is the enzyme responsible for the generation of angiotensin I and therefore has a critical role in regulating blood volume and vasoconstriction. The product was evaluated in six double-blind, placebo-controlled studies and demonstrated a reduction in systolic blood pressure of 14.8 mmHg (for a 300mg dose) compared to 5.7 for placebo. Tekturna HCT is a co-formulation of the active drug in Tekturna with hydrochlorothiazide, a diuretic commonly prescribed for hypertension. The addition of the drug to the formulation increased the total change in systolic blood pressure to 21.2 mmHg compared to 7.5 for placebo in the Phase III trial. For comparison, during a head-to-head study the ACE inhibitors Norvasc (amlodipine) and Monopril (fosinopril) reduced systolic blood pressure by 19 and 13 mmHg respectively.1
Tatti P, et al. (1998). Outcome Results of the Fosinopril Versus Amlodipine Cardiovascular Events Randomized Trial (FACET) in Patients With Hypertension and NIDDM. 21(4), 597-603
The combined Tekturna brand had sales of $156m in 2015. Sales of the drug have been steadily declining from a peak of $557m in 2011, when a clinical trial of the drug showed a high number of kidney problems and strokes among diabetic patients. The drug was the subject of a number of past and ongoing legal challenges associated with possible stroke and renal complications. Novartis halted promotion of the drug following the clinical result, and we expect residual sales to continue to decline under the new partnership. However, sales likely represent a stable population of patients that are well controlled by the medication. This is evidenced by the fact that the decline in sales has slowed from approximately 30% per year following the clinical results to 8.7% over the past 12 months (according to Symphony Health).
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Exhibit 1: Tekturna sales |
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Source: Novartis, PDL BioPharma |
Tekturna is covered by a composition of matter patent until 2018 in the US and 2020 in the EU. The drug is additionally protected by manufacturing patents until 2026, which are a significant barrier due to the difficulty in synthesizing the drug. We do not expect significant competition from generics because the dwindling market for the drug does not warrant the manufacturing investment.
The deal
This multi-tiered deal involves equity investment from PDL in Noden Pharma, which will subsequently use the capital (in addition to other funds) for the acquisition of Tekturna from Novartis. Noden will purchase the drug for $110m on the date of the closing with $89m due on the one-year anniversary and up to $95m in milestones related to sales and generic entrants. PDL will support the transaction by providing $75m at the time of closing and expects to provide least $32m on the first year anniversary and $38m for milestones for a predicted total cost of $145m. Noden will seek additional financing for the transaction via debt, but PDL has agreed to finance any shortfalls, which could potentially obligate it to finance the entirety of the deal. PDL will receive an equity stake corresponding to 88% from the transaction.
Valuation
We are not updating our valuation of PDL ($1,036m or $6.28 per basic share) to reflect Tekturna sales until the closing of the acquisition. For illustrative purposes, we currently value the asset at $245m based on an NPV analysis with a WACC of 10%. PDL’s 88% equity stake corresponds to $215m. We have included the $95m in expected future milestone payments (but no other features of the deal) in the valuation. We are including the total amount of milestone payable because we expect neither generic entrants nor substantial declines in sales during the near term, which are the basis for the payments. We predict a decline in sales of approximately 10% per year, which is in line with the decline in sales over the preceding 12 months as reported by Symphony Health (8.4%). Our modelled profit margin for the product is approximately 50%. We model a COGS of 15%, which is higher than average for pharmaceutical products, based on communication with the company expressing the difficulty in manufacturing the drug. We expect the company to maintain a small salesforce (estimated 10-20), which we account for with a 10% cost of selling and $5m in yearly fixed SG&A costs. Noden is domiciled in Ireland and we have assumed the standard 12.5% corporate tax rate, although the effective rate may be higher if PDL choses to repatriate earnings to the US. Based on these predictions PDL will be able to recoup its targeted $145m outlay in H217. There is a near-term risk associated with the transaction that Noden may not be able to raise the additional capital (up to $149m) necessary to finance the transaction, and PDL would be obligated to cover the shortfall. An additional risk is that sales of Tekturna may decline at a faster than predicted pace. However, as currently valued, the deal is immediately accretive for PDL.
Financials
We predict Tekturna sales of $69m for H216 and $127m for 2017, corresponding to $32m and $58m in earnings paid to PDL respectively during these periods. However, these values are provided for illustrative purposes only, and we are not including this revenue in our forecasts until after the closing of the transaction. We do not predict that Noden will have difficulty financing the remainder of the transaction costs ($149m at most) or servicing the resultant debt, as this equates to approximately two years of our predicted EBITDA for the product. However, the resultant terms of this financing may have a material impact on our forecasts. If the deal closes, Noden financials will be consolidated with PDL on the basis of PDL’s majority ownership.
Exhibit 2: Financial summary
US$000s |
2014 |
2015 |
2016e |
2017e |
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Year end 31 December |
US GAAP |
US GAAP |
US GAAP |
US GAAP |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
581,225 |
590,448 |
154,537 |
69,412 |
Cost of Sales |
0 |
0 |
0 |
0 |
||
Gross Profit |
581,225 |
590,448 |
154,537 |
69,412 |
||
General & Administrative |
(34,914) |
(36,090) |
(38,977) |
(42,095) |
||
EBITDA |
|
|
546,311 |
550,379 |
115,559 |
27,317 |
Operating Profit (before GW and except.) |
|
546,311 |
550,379 |
115,559 |
27,317 |
|
Intangible Amortization |
0 |
0 |
0 |
0 |
||
Other |
0 |
(3,979) |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Operating Profit |
546,311 |
550,379 |
115,559 |
27,317 |
||
Net Interest |
(38,896) |
(26,691) |
(18,080) |
(18,040) |
||
Other |
(6,143) |
6,450 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
501,272 |
530,138 |
97,479 |
9,277 |
Profit Before Tax (FRS 3) |
|
|
501,272 |
530,138 |
97,479 |
9,277 |
Tax |
(179,028) |
(197,343) |
(35,977) |
(3,247) |
||
Deferred tax |
(0) |
(0) |
(0) |
(0) |
||
Profit After Tax (norm) |
322,244 |
332,795 |
61,502 |
6,030 |
||
Profit After Tax (FRS 3) |
322,244 |
332,795 |
61,502 |
6,030 |
||
Average Number of Shares Outstanding (m) |
158.2 |
163.4 |
164.2 |
167.5 |
||
EPS - normalised (c) |
|
|
203.66 |
203.69 |
37.46 |
3.60 |
EPS - FRS 3 (c) |
|
|
2.04 |
2.04 |
0.37 |
0.04 |
Dividend per share (c) |
61.1 |
60.2 |
20.0 |
20.0 |
||
Gross Margin (%) |
100.0 |
100.0 |
100.0 |
100.0 |
||
EBITDA Margin (%) |
94.0 |
93.2 |
74.8 |
39.4 |
||
Operating Margin (before GW and except.) (%) |
94.0 |
93.2 |
74.8 |
39.4 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
606,453 |
733,468 |
706,359 |
652,926 |
Intangible Assets |
0 |
0 |
0 |
0 |
||
Tangible Assets |
62 |
31 |
19 |
7 |
||
Royalty rights |
259,244 |
399,204 |
383,125 |
346,521 |
||
Other |
347,147 |
334,233 |
323,216 |
306,398 |
||
Current Assets |
|
|
355,897 |
279,731 |
341,155 |
383,234 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
300 |
0 |
0 |
0 |
||
Cash |
291,377 |
218,883 |
277,234 |
324,428 |
||
Other |
64,220 |
60,848 |
63,921 |
58,806 |
||
Current Liabilities |
|
|
(187,983) |
(36,662) |
(12,012) |
(266,327) |
Creditors |
(318) |
(394) |
(1,466) |
(1,466) |
||
Short term borrowings |
(175,496) |
(24,966) |
0 |
(254,315) |
||
Other |
(12,169) |
(11,302) |
(10,546) |
(10,546) |
||
Long Term Liabilities |
|
|
(313,930) |
(283,485) |
(294,901) |
(53,549) |
Long term borrowings |
(276,228) |
(232,835) |
(241,352) |
0 |
||
Other long term liabilities |
(37,702) |
(50,650) |
(53,549) |
(53,549) |
||
Net Assets |
|
|
460,437 |
693,052 |
740,601 |
716,284 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
292,281 |
301,465 |
88,250 |
(54,498) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(49) |
(9) |
(24) |
(24) |
||
Acquisitions/disposals |
21,360 |
(71,593) |
10,735 |
73,207 |
||
Financing |
0 |
0 |
0 |
0 |
||
Dividends |
(96,557) |
(98,307) |
(32,883) |
(33,491) |
||
Other |
(159,420) |
(8,046) |
17,273 |
62,000 |
||
Net Cash Flow |
57,615 |
123,510 |
83,351 |
47,194 |
||
Opening net debt/(cash) |
|
|
300,978 |
160,347 |
38,918 |
(35,882) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Exchange rate movements |
0 |
0 |
0 |
0 |
||
Other |
83,016 |
(2,081) |
(8,551) |
(12,963) |
||
Closing net debt/(cash) |
|
|
160,347 |
38,918 |
(35,882) |
(70,113) |
Source: PDL BioPharma accounts, Edison Investment Research
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