Q2 2019 Earnings Call

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Afternoon may have been in the conference or Collins to join.

Good afternoon PDL Biopharma.

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I have a spelling of your first and last name.

First name are a C. H E L last name and I D H.

They have your company name.

Hey, I E R. A.

And your telephone number.

The one too.

960.

3697.

Okay.

Your email address.

Rachel like a first name.

At our Euro Dot com.

Like a company.

Okay. Thank you I was wondering now.

Hormonal contraception, but are concerned about the side effects and the long term impact Oklahoma loans.

Of the women surveyed in the Mpower study, 88% said that a non Oman all aspect of and for other most important are extremely important to the decision to use them for in the future.

From a payer standpoint, we believe I don't see why we'd be widely reimbursed as a standalone contraception method in the U.S.

With low or no coping with the requirements of the Affordable Care Act.

I'll also holds potential for label expansion due to its ability to create a nice city can view and Matt that if that is indisputable to microbes.

Such as Chlamydia and gonorrhea.

April payments recently completed enrollment of 860 patients in the landmark compare guns phase II clinical trial. We've done so are those of prevention of chlamydia.

And with the secondary endpoint of prevention of gonorrhea.

And they recently affirmed that it is on track to report topline result in November this year.

It is important to note that they are no marketed products indicated for the prevention of chlamydia.

One of the most common sexually transmitted infection in the U.S.

Importantly, able turn has a well defined commercial strategy designed to maximize on for adoption foreclosure prevention of pregnancy.

This strategy include assembling a salesforce that covers 96% of the top prescribers of contraceptive products and plans to initiate direct to consumer advertising within six to nine months first commercial launch.

If you will from has a strong balance sheet with more than $50 million in cash as of June Thirtyth, which is expected to fund planned activities for the second quarter of 2020.

These include the NDA resubmission for the pregnant for the prevention of pregnancy.

The commencement of pre commercial activities and the completion of the Imperva phase Twob studies for the prevention of Chlamydia.

And last April 10th management team brings all event and extensive experience and a passion to success to succeed but is inspiring.

Turning to slide seven so how do we create shareholder value with this investment.

Didier we carry.

Our investment enable them at fair value as reflected in the $45.5 million noncash gain for this quarter.

The fair value of our investment is based on the stock price at the close of each quarter.

In terms of Opex to share price evolution. We are excited about the number of near term catalyst that include.

So resubmission of the NDA for on fall off of the pigment prevention of pregnancy, which is expected in the fourth quarter of 2019.

The release of Phase Twob topline data.

Funds the freight on trial on the use of unfold for the prevention of Chlamydia with the secondary endpoint of prevention of Granola.

Which is also expected in the fourth quarter of 2019.

The biggest ideal form for us for the prevention of pregnancy, which is expected in the first half of 2020 and the commercial launch of unfolding the U.S subject to FDA approval, which is expected in the second half of 2020.

Over time, we expect to be able to end stock price will appreciate as they execute on their strategy in turn we are confident that this will impact positively PDF stock price.

Moving onto slide eight.

We are well positioned to continue executing our PDL business strategy.

We continue to have a liquid balance sheet with $285 million in cash along with oil city wide, but I expected to generate $521 million in cash flow through 2026, even with the recent adjustment to the accident year ex royalty forecast.

As mentioned, we expect that cash flow generated by our current business will be in excess of our personal needs, thereby providing additional cash to invest in our future.

We are also striving to maximize our financial resources for strategic investment with a strict management of operating expenses.

We continue to review numerous opportunities and consider a broad range of investment options in building our portfolio.

Well there are a number of factors that we believe PDL NH in executing on these opportunities.

Including our liquid balance sheets with Elias Olos as to quickly develop sunesis reforms.

Our experience and speed, which enable us to be credible in negotiations.

And our flexibility and negotiating automotive structures for all parties involved.

All these factors played a role in the successful completion of the able them Securities agreement.

In terms of the types of transaction we are pursuing.

We are seeking from asset that can benefit from accessing our capital and expertise with differentiating commercial stage products.

Innovative late stage assets and high quality collaborative team, we can be on top.

We are considering therapies that target undeserved categories, and all areas of high unmet need.

We have the ability to compete commercially we focused sales team.

We are focusing on the us market as our geographic preference.

And we are seeking structures that enable attractive return and the opportunity to be actively engaged.

Turning now to our share repurchase program on slide nine.

In July 2019, we completed a $100 million stock repurchase program authorized by our board last September .

Under this program, we repurchased approximately 31 million shares at an average price of $3.22 per share.

Overall freak operated share repurchase program since 2017 in total we used a $155 million to repurchase 53.1 million shares at an average price of $2.92 per share.

Let me now review our current portfolio of companies starting with LENSAR on slide 10.

Product revenues from the LENSAR laser system was $7.4 million, a 26% increase from the second quarter of 2018.

And a 10% increase from the first quarter of 2019.

These increases are due primarily to the new outside the U.S.

For sheer volume increased by 28% during the second quarter of 2019 of the prior year period, and 7% from the first quarter of 2019.

Linda has significant growth potential in the refractive cataract surgery market, which is the number one surgical procedures globally by volume.

Lanza is a clear innovation leader in cataract surgery, and is becoming the laser of choice for surgeons implanting intraocular lenses that require greater accuracy and pushes your customization.

We expect R&D efforts to increase in the coming quarters artisans are continues to be built its leadership position by further enhancing its technology and seeking additional five 10-K approval for expanded indications.

Now turning to slide 11.

Noden pharma is focused on maximizing the value of REIT delays and take to an ever increasing profitability and mitigating the impact of generic competition.

No Dan partner price core laboratories began distributing an authorized generic version of TICC tuning into us in March of this year.

Our first to market strategy is proving effective as tacoda branded pick tuna and transcos authorized generic uptick tuna captured a 74% us market share at the end of the second quarter of 2019.

Given that Aliskiren is both expensive and difficult to manufacture we do not expect additional third party generic competition for tech tuna beyond the January product launch by engine.

To maximize profitability maiden and no Dane ceased all promotional efforts in the second quarter this year and as restructured the new at the North end use team.

This will result in further expense savings in the second half of 2019.

No downtrodden modest net loss for the second quarter compared with net income of $5.6 million in the first quarter of 2019, which included the initial product shipment to PENSCO.

For the first six months of 2019, Noden was profitable with net income of $5.3 million.

Before I provide additional details on our financial I would like to welcome vanished Natasha Hyundai to our board of Directors, Natasha Senior Vice President of corporate development at Seattle Genetics, and remember that firms Executive Committee.

She brings to our board highly relevant experience in evaluating and successfully executing M&A transactions.

And on behalf of our board and the entire PDMC may want to extend my heartfelt. Thanks.

To Pete Garcia for his many contributions over the past six years as our CFO .

Two days before final quarterly call with PDL and he will be leaving as next week.

We are conducting a search for professional to step into vis vis vis a central position on our senior leadership team.

Pete will now review our financial results Pete.

Thank you Dominic.

Please turn to our income statement on slide number 12.

For the three months ended June 32019, our GAAP net loss was $4.4 million or four cents per share.

Total revenues were negative $22.5 million for the period and consisted primarily of product revenues of $17.8 million.

And net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets.

The negative $40.4 million.

Our total revenues of negative $22.5 million for the second quarter of 2019, compared with $46.6 million for the second quarter of 2018. The reason for the negative revenue as a result of a noncash write down of the accelerates royalty assets fair value of approximately $60 million.

Without this fair value adjustment total revenues for the quarter would have been $37.4 million.

Product revenues for the second quarter of 2019 or $17.8 million compared with $31.8 million in the prior year period.

Product revenues were $10.4 million from Noden product sales, which consisted of $2.7 million from the us and $7.7 million in the rest of the world.

Linda our revenues for the quarter were $7.4 million.

The decrease in product revenues was due to a decrease in noden product sales split equally between the us and the rest of the world.

The decline in the Noden sales in the US market was due to the initial inventory stocking of our authorized generic form of Tekturna late in the first quarter of 2019, which limited shipments of the authorized generic in the second quarter as well as the launch of a third party generic form of Aliskiren late in March of 2018.

Sales of resolutions and resume as HCT and the rest of the world declined primarily due to the initial inventory stocking in Japan in the second quarter of 2018.

Revenues from the change in the fair value of royalty rights were negative $40.4 million for Q2 of 2018 compared with $12.8 million for the prior year period.

The decrease was related to a noncash adjustment to the accelerates royalty asset and it was due to the slower adoption of the product than was previously anticipated.

A third party assessment of the accelerates royalty asset conducted in the second quarter of 2019 led to a downward revision of the forecasted sales of the product in Europe with a direct impact on both the sales base royalties and the sales based milestones expected to be received by PDL through 2033.

This was partially offset by higher royalties from the associate royalty asset.

We received $20.1 million in cash royalties for the second quarter of 2019.

Turning to operating expenses for the second quarter of 2019 total operating expenses were $27.4 million, a $144.3 million reduction compared with $171.7 million for the prior year period.

The decrease in operating expenses was the result of the $152.3 million impairment of the Noden products intangible assets in the second quarter of 2018 due to the increased probability of a third party generic version of Alice guarantee and launched in the us.

A $4.8 million a decrease in amortization expense for the known intangible assets as a result of the impairment recorded for those intangible assets in the second quarter of 2018.

A $4 million or 28% in reduction in GNS expenses, primarily due to lower professional fees.

A $3.3 million or 62% reduction in sales and marketing expenses, reflecting the cost savings from the change in marketing strategy for the Noden products and a $2.2 million decrease in noden product and LENSAR cost of product revenue.

The decrease was partially offset by the $22 million reduction to the contingent liability in the second quarter of 2018 or future Noden product milestones that were less likely to be made with the increased probability of a third party generic version of Aliskiren being launched in the U.S.

Moving onto our year to date results on the same slide.

For the six months ended June 32019, our GAAP net income was $2.3 million or two cents per share total revenues were $16.4 million, which compares with $85.1 million. The decrease was primarily due to the lower royalty asset revenues and lower product revenues from our pharmaceutical segment.

Product revenues were $44.5 million compared with $55.1 million for the prior year period.

Product revenues consisted in 2019 consisted of $30.4 million from the sale of Noden products and $14.1 million from the product sales of the LENSAR laser system.

Net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets was a negative $28.1 million. This compares with $23.9 million for the year ago period. The decrease was related to the accelerates royalty asset fair value decrease as discussed previously.

Year to date in 2019, PDL has received $32.7 million in cash royalties.

Interest revenues decreased by $1.5 million from the prior year period due to modifications to our agreement with Fairview communications, which suspended interest payments.

Operating expenses for the six months ended June 32019 were $55.8 million compared with $205.9 million for the prior year period.

The decrease primarily resulted from the impairment of the Noden products intangible asset of $152.3 million in Q2 2018.

A $9.5 million decline in amortization expense for the Noden intangible assets.

A $6.1 million or 556% decline in sales and marketing expenses, reflecting the cost savings from our the change in our marketing strategy for Noden product and a $5.2 million or 20% decline in general and administrative expenses, primarily due to lower professional fees. The decrease was partially offset by the $22.7 million reduction to the contingent liability in the first half of 2018 for future Noden miles product milestone payments.

Turning to our non-GAAP financials on slide 13.

We adjusted our Q2 2019, GAAP net loss of $4.4 million for the Mark to market changes in fair value amortization of intangible assets and other noncash items. This resulted in non cash net income of $12.7 million for the second quarter of 2019, which compares with $15.5 million for the prior year period.

Year to date, we adjusted our non-GAAP net income of $2.3 million for the first six months of 2018 with the same adjustments as the second quarter, which resulted in non-GAAP net income of $24.5 million, which results, which compares with non-GAAP net income of $31.1 million for the prior year period.

Turning to our balance sheet on slide 14.

We had cash and cash equivalents of approximately $285 million as of June 32018, compared with $395 million as of December 31, 2018. This reduction in cash as a result of $70.4 million used for our stock repurchase.

Program and $60.4 million use for our investment in Evo fem, partially offset by cash flow from royalties.

Turning to slide 15.

With regard to future guidance.

With the launch of the authorized generic of Tekturna and known competition from a third party generic we're now in a position to give guidance on noden product revenue for 2019.

For the full year 2019, we expect the noden product revenue to be $50 million to $55 million and for LENSAR. We expect full year 2019 product revenue to be $27 million to $29 million.

As far as royalty rights fair value with the potential changes in long term forecasts, we cannot give proper guidance for royalty revenue changes in fair value. However, given the large glumetza royalty of $11.3 million received in August we are increasing our cash royalties expectations for 2019 to between $60 million to $65 million.

As far as our investment in demo some goes.

The accounting impact will be driven by Lcms stock price and volatility as future Mark to market adjustments will be based upon the quarter in stock price and warrant valuation changes in fair value will be booked under non operating income or loss as a change in fair value to an equity affiliate and the total value of the investment will be reflected on our balance sheet as an investment in an equity affiliate.

Before I turn the call back over to the operator I'd like to express my gratitude to the PDL team into the board for their support these past six years.

To my colleagues and to our investors the assistants, who provided me and the insight you should have been invaluable to me.

As an investor I look forward to following sales progress in securing strategic transactions with therapeutics that have strong revenue potential.

With that we're ready to open the call up for questions.

Ladies and gentlemen, if you wish to register for a question.

For todays question and answer session you will need to press Star then the number one on your telephone. If your question has been answered and you wish to withdraw your request you may do so by pressing the pound key if you are using a speakerphone. Please pick up your handset before answering your question one moment. Please for the first question.

And while we are waiting for our first question I'd like to mention our occupation into Cantor ICSI Joy Global Healthcare conference being held October six and for the full in New York a webcast of our presentation will be available on our website.

Operator, we are ready for the first question.

Our first question will come from Max Jacobs Edison Group.

Hi, guys. Thanks for taking my question.

Okay, and Pete I'll, we'll all Miss you.

Thank you, Matt Joe write backs, we will miss him.

Yes.

So first I just wanted to ask about LENSAR is there any additional color you can give give us on just what what's driving fee if a nice growth.

During the ticket.

Yes, so I mean, they are making a lot of good progress with systems implementation and new systems.

Obviously, there were some adjustments related to that with the March gross margin its way through the Mart gross margin going down, but thats because they have new systems out there and then obviously with new systems comes.

More procedures and that would lead to additional nice growth.

Obviously, we also talked about previously that they were somewhat limited.

In their funding and financing.

And once PDL stepped in and I think that kind of change the way that.

Ophthalmologist started looking at their business.

Yes, Jay fit to be left on that I think.

Fair to say that the innovative nature of the data leads us system gets increasingly recognized and that the market for these systems publicly outside of Z wave, but also inside the U.S.

<unk> is getting increasing traction.

Now I would sideways, particularly in Asia.

There has been some some concern about the NGL Edmonton, but types in particular from China, but at this point the company continued to make very good progress and it is also an area as you have seen where we make investments in R&D, because we really believe that the linzess technology is that app is really differentiated in the marketplace.

Great. Thanks, that's very helpful. And then just since we're on the subject of China. I was just wondering on the insurance check Tekturna launch in China, I'm, just what the size of that.

Yes, no. Thank you and as launching sign out you know Posey agreement, we are not I mean, the royalty payments on those kicking off in TL out of Avenue for GTM invalid, very small focus Tom we have some fixed payments, which.

I will be paid on an annual basis, but it has taken place in the second quarter as announced.

A's and now what I would call essentially stealing the pre launch phase where they are just working on ongoing be as efficient east end.

And spreading the.

The adoption I think we will hopefully as a much more granular kind of update for you in the second quarter into third quarter.

Okay, Great and then just one last question I was just wondering if you'd be able to share what you expect that zalviso peak sales to be in.

Based on your new forecast.

Oh, we don't release that information.

Sorry, it was worth a try.

Okay, you made in check with accelerates and actually the actual royalties come from Grunenthal as you are aware and they are a private company. So.

We had enough time trying to get enough information.

Over the last few months here.

But as you have seen in the press release I think we actually gave the some of the key findings from from back that extend on AD agencies and I think it may help you figuring out the challenges that they're facing.

Yes definitely.

Thanks for taking my question.

Youre welcome. Thank you Mac safety mix.

Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad to withdraw press the pound key.

And it appears we have no further questions I'd like to turn the call back over to Dominic for closing comments.

Well. Thank you all again once again for joining US today, we are excited about our transformation at PDL as we'd be up at focus portfolio quality companies with promising product.

While streamlining of the same time, our balance sheet, we look forward to updating you on our progress when PDR reports third quarter 2019 results in early November in meantime, we wish you a wonderful end of your day.

Again, we'd like to thank you for participating on today's conference call you may now disconnect.