2016 Fourth Quarter Update March 15, 2017
 
 

Dear Shareholder:

Following are some of the key points regarding PDL’s fourth quarter and year-end 2016 financial and business results.

Highlighted Financial Results from Q4 and FY  2016

  • Total revenues of $66.5 million and $244.3 million for the three and 12 months ended December 31, 2016, respectively.
  • GAAP diluted EPS of ($0.06) and $0.39 for the three and 12 months ended December 31, 2016, respectively.
  • GAAP net loss attributable to PDL’s shareholders of $10.3 million and net income of $63.6 million for the three and 12 months ended December 31, 2016, respectively.
  • Non-GAAP net loss attributable to PDL’s shareholders of $8.6 million and net income of $108.1 million for the three and 12 months ended December 31, 2016, respectively.

The loss attributable to the three months ended December 31, 2016 was a result of a $51.1 million impairment charge relating to our Direct Flow Medical note receivable investment.

Updates on royalty-bearing products relating to Queen et al. Patents

Tysabri®  (Approved royalty-bearing product relating to Queen et al. patents)

  • Continue to receive royalties on Tysabri from Biogen with respect to sales of the licensed product manufactured prior to patent expiry in jurisdictions providing patent protection licenses.
  • PDL received a royalty payment for the first quarter of 2017 in the amount of $14.2 million for royalties earned on sales of Tysabri. The duration of this royalty payment is based on the sales of product manufactured prior to patent expiry, the amount of which is uncertain.
  • Historical royalty and sales data are listed [in the table below.]

Noden Pharma

  • On July 1, 2016, Noden Pharma DAC, a newly-formed company organized under the laws of Ireland purchased from Novartis the exclusive worldwide rights to manufacture, market, and sell the branded prescription medicine product sold under the name Tekturna® and Tekturna HCT® in the United States and Rasilez® and Rasilez HCT® in the rest of the world, and is indicated for the treatment of hypertension.
  • PDL is a majority owner of Noden and holds three of five board seats. Noden has filled critical leadership positions over the past six months, and the companies are evaluating additional specialty pharma products in the form of optimized, established medicines, to acquire for Noden.
  • Responsibilities related to Tekturna are actively transitioning from Novartis to Noden. As it relates to commercialization of Tekturna, Noden assumed commercialization responsibilities for the US in early October and has hired a dedicated contract sales force of approximately 40 reps and four district managers that began commercialization efforts at the end of February 2017. Initially, the deal called for Novartis to continue to distribute the four products on behalf of Noden worldwide, and Noden would receive a profit split on such sales. In the United States, the duration of the profit split ran from July 1, 2016 through October 4, 2016.
  • Ex-US, Novartis companies will continue to distribute the products through transfer of the marketing authorizations in such countries (expected to occur in the first half of 2017) and Noden Pharma DAC will receive the profit transfer from Novartis. Novartis and Noden Pharma DAC are working to transfer the marketing authorizations from Novartis companies to Noden Pharma DAC. The primary focus of Noden Pharma DAC’s commercialization efforts will be EU, Switzerland and Canada. Noden Pharma DAC will likely seek distributors for certain territories, such as Japan.

Updates on Income Generating Assets\

Royalty Rights Assets

The following table provides additional details with respect to the fair value of the PDL royalty rights assets as of December 31, 2015 and with changes to December 31, 2016 as reflected in our Balance Sheet:

(in thousands) Fair Value as of December 31, 2015  New Assets Royalty Rights – Change in Fair Value Fair Value as of December 31, 2016
>Depomed $ 191,865 $ $ (27,795) $ 164,070
VB 17,133 (2,136) 14,997
U-M 70,186 (34,800) 35,386
ARIAD 50,041 50,000 8,590 108,631
AcelRx 67,437 46 67,483
Avinger 2,542 (904) 1,638
KYBELLA 9,500 613 10,113
$  399,204 $  59,500  $ (56,386) $  402,318

The following tables provides a summary of activity with respect to our royalty rights – change in fair value for the year ended December 31, 2016:

(in thousands) Cash Royalties  Change in Fair Value Royalty Rights – Change in Fair Value
Depomed $ 59,342 $ (27,796) $ 31,546
VB 1,468 (2,135) (667)
U-M 3,013 (34,799) (31,786)
ARIAD 7,508 8,590 16,098
AcelRx 8 46 54
Avinger 1,220 (905) 315
KYBELLA 23 613 636
$  72,582  $ (56,386) $ 16,196

 

Updates on Royalty Rights Assets

Depomed, Inc.

  • Glumetza royalty audit is on-going.
  • Monthly payments from Valeant continue to fluctuate from $2 million to $8 million.
  • Recent product approvals, Jentadueto XR, Invokamet XR and Synjardy XR have yielded $17 million in milestones in 2016 and will begin generating royalties to PDL.
  • Low to mid-single digit royalties to PDL on new product approvals expected to continue to 2023 for Invokamet XR and 2026 for Jentadueto XR and Synjardy XR.

ARIAD Pharmaceuticals, Inc.

  • Ariad acquired by Takeda in February 2017.
  • PDL has exercised its put option and will be repaid an estimated $110 million which is 1.2 times the $100 million advanced to Ariad less any sums already repaid. It is currently estimated that our annualized internal rate of return on this investment will be 18%.
  • Repayment expected in late March or early April 2017.

KYBELLA Royalty Agreement

  • On July 8, 2016, PDL entered into a royalty purchase agreement with an individual, whereby the Company acquired that individual’s rights to receive certain royalties on sales of KYBELLA® by Allergan, in exchange for a $9.5 million cash payment and up to $1.0 million in future milestone payments based upon product sales targets. The first revenues on this transaction were recognized in Q3 2016. Royalties to be paid out every six months.

Notes Receivable

The following tables present the fair value of assets and liabilities not subject to fair value recognition by level within the valuation hierarchy:

 December 31, 2016  December 31, 2015
Carrying Value Fair Value Level 2 Fair Value Level 3 Carrying Value Fair Value Level 2 Fair Value Level 3
(In thousands)
Assets:
Wellstat Diagnostics note $  50,191  $ $ 52,260 $ 50,191 $  —  $ 55,970
Hyperion note  1,200 1,200 1,200 1,200
LENSAR note  43,909 43,900 42,271 42,618
Direct Flow Medical note 10,000 10,000 51,852 51,992
Paradigm Spine note  — 53,973 54,250
kaléo note  146,685 142,539 146,778 146,789
CareView note  18,965 19,200 18,640  — 19,495
Total $  270,950 $  —  $ 269,099 $ 364,905 $ $ 372,314

Updates on Notes Receivable

Wellstat Diagnostics, LLC

  • In NY court action commenced by PDL to collect from related entities who are guarantors of the loan, the judge ruled in favor of PDL and has appointed a magistrate to determine PDL’s damages. Wellstat appealed the ruling, and their appeal was heard in January 2017.
  • In February 2017, the appellate division of the NY court reversed on procedural grounds the portion of the decision granting PDL summary judgment, but affirmed the portion of the decision denying the Wellstat Diagnostics guarantor defendants’ motion for summary judgment in which they sought a determination that the guarantees had been released.  As a result, the litigation has been returned to the Supreme Court of New York to proceed on PDL’s claims as a plenary action.
  • PDL has commenced a non-judicial foreclosure process to collect on the sale of certain Virginia real estate assets owned by the guarantors of the loan.

Direct Flow Medical, Inc.

  • Potential lead investor unexpectedly withdrew its term sheet for tranched $65 million equity investment and certain ex-US rights to Direct Flow Medical (DFM) products.
  • DFM shut down operations in December 2016.
  • PDL initiated foreclosure proceedings in January 2017 which resulted in obtaining ownership of certain of the Direct Flow Medical assets through a wholly-owned subsidiary, DFM, LLC.
  • PDL wrote off $51.1 million of assets against ordinary income in Q4 2016.
  • In Q1 2017, PDL monetized $7.0million of those assets. PDL expects to further monetize assets, the amount of which, if any, is unknown.

LENSAR Credit Agreement

  • Alphaeon is divesting all of its ophthalmology business, including LENSAR.
  • In December 2016, LENSAR Inc. re-acquired the assets it had sold to Alphaeon and assumed the obligations under the PDL credit agreement. Also in December, LENSAR Inc., with the support of PDL, filed for bankruptcy under Chapter 11. LENSAR has filed a plan of reorganization with our support under which, subject to bankruptcy court approval, it is expected that LENSAR will issue equity securities to us in exchange for a portion of our claims in the Chapter 11 case and will become one of our operating subsidiaries. We estimate that this proceeding will be concluded in 2Q17.
  • In January 2017, the bankruptcy court approved a debtor-in-possession credit agreement whereby PDL agreed to provide up to approximately $2.8 million to LENSAR so that it can continue to operate its business during the remainder of the bankruptcy proceeding.

Paradigm Spine Credit Agreement

On August 26, 2016, the Company received $57.5 million in connection with the prepayment of the loans under the Paradigm Spine Credit Agreement, which included a repayment of the full principal amount outstanding of $54.7 million, plus accrued interest and a prepayment fee.

kaleo, Inc.

  • Despite Auvi-Q being voluntarily pulled from market and Sanofi returning the product right to kaléo, kaléo has made all required interest payments in full and on time to date.
  • Evzio sales have been much stronger than projected so far. This is secondary source of repayment to PDL.
  • kaléo has publicly announced that Auvi-Q has returned to the market in February 2017.

Queen et al. Royalty Revenue by Product ($ in 000’s) *

Tysabri Q1 Q2 Q3 Q4 Total
2017 14,156 14,156
2016 13,970 14,232 14,958 43,160
2015 14,385 13,614 13,557 14,031 55,587
2014 12,857 13,350 16,048 15,015 57,270
2013 12,965 13,616 11,622 12,100 50,304
2012 11,233 12,202 11,749 12,255 47,439
2011 9,891 10,796 11,588 11,450 43,725
2010 8,791 8,788 8,735 9,440 35,754
2009 6,656 7,050 7,642 8,564 29,912
2008 3,883 5,042 5,949 6,992 21,866
2007 839 1,611 2,084 2,836 7,370
2006 237 237

* As reported to PDL by its licensees
Totals may not sum due to rounding

 

Queen et al. Reported Net Sales Revenue by Product ($ in 000’s) *

Tysabri Q1 Q2 Q3 Q4 Total
2017 471,877 471,877
2016 465,647 474,379 498,618 1,438,644
2015 479,526 453,786 451,898 467,735 1,852,945
2014 428,561 442,492 534,946 500,511 1,906,510
2013 434,677 451,358 387,407 403,334 1,676,776
2012 374,430 401,743 391,623 408,711 1,576,508
2011 329,696 356,876 388,758 381,618 1,456,948
2010 293,047 287,925 293,664 316,657 1,191,292
2009 221,854 229,993 257,240 285,481 994,569
2008 129,430 163,076 200,783 233,070 726,359
2007 30,468 48,715 71,972 94,521 245,675
2006 7,890 7,890

* As reported to PDL by its licensees
Totals may not sum due to rounding

Forward-looking Statements

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Each of these forward -looking statements involves risks and uncertainties. Actual results may differ materially from those, express or implied, in these forward-looking statements. Important factors that could impair the value of the Company’s royalty assets, restrict or impede the ability of the Company to invest in new income generating assets and limit the Company’s ability to pay dividends are disclosed in the risk factors contained in the Company’s Annual Report on Form 10-K, as updated by subsequent quarterly reports filed with the Securities and Exchange Commission, as updated by subsequent filings. All forward-looking statements are expressly qualified in their entirety by such factors. We do not undertake any duty to update any forward looking statement except as required by law.

Sincerely,

John P. McLaughlin
President and Chief Executive Officer
PDL BioPharma, Inc.
March 2017