2016 Second Quarter Update August 4, 2016
 
 

Dear Shareholder,

Following are some of the key points regarding PDL’s second quarter 2016 financial and business results.

 Highlighted Financial Results from Q2 2016

  • Total revenues of $21.0 million and $124.2 million for the three and six months ended June 30, 2016, respectively.
  • GAAP diluted EPS of $0.03 and $0.37 for the three and six months ended June 30, 2016, respectively.
  • GAAP net income of $4.1 million and $60.0 million for the three and six months ended June 30, 2016, respectively.
  • Non-GAAP diluted earnings per share (EPS) of $0.09 and $0.61 for the three and six months ended June 30, 2016, respectively.
  • Non-GAAP net income of $15.1 million and $100.2 million for the three and six months ended June 30, 2016, respectively.

The largest component of the difference in non-GAAP measure compared to GAAP is the exclusion of mark-to-market reduction in fair value of our investments in royalty rights. A full reconciliation of all components of the GAAP to non-GAAP quarterly financial results can be found in Table 4 of the August 4th press release.sta

Updates on Approved Royalty Bearing Products Related to Queen et al. Patents

In the second quarter of 2016, royalties from PDL’s licensees to the Queen et al. patents were $14.2 million, which consisted of royalties earned on sales of Tysabri® under a license agreement associated with the Queen et al. patents.  Under the terms of the legal settlement between Genentech and PDL, the first quarter of 2016 was the last period for which Genentech paid royalties to PDL for Avastin®, Herceptin®, Xolair®, Kadcyla® and Perjeta®.  Royalty payments for Avastin®, Herceptin®, Xolair®, Kadcyla® and Perjeta® accounted for 86 percent of the $121.5 million Queen et al. royalty revenue recognized in the first quarter of 2016, with no revenue in the second quarter.

Other products from the Queen et al. patent licenses entitle us to royalties following the expiration of our patents with respect to sales of licensed product manufactured prior to patent expiry in jurisdictions providing patent protection licenses. The amount of royalties we are due for product manufactured prior to patent expiry but sold after patent expiry is uncertain.

Updates on Income Generating Assets

Solanezumab (Unapproved royalty-bearing product relating to Queen et al. patents)

  • Completed enrollment and continuing patient follow up on Phase 3 clinical trial.
  • Top line data from Phase 3 trial in mild Alzheimer’s disease expected in 4Q16. Lilly would file for product approval in 1H17 if data are positive.
  • PDL has a 2% know-how royalty on solanezumab which runs for 12.5 years from the date of its first sale.

Wellstat Diagnostics, LLC

  • On July 29, 2016, the Supreme Court of New York issued its Memorandum of Decision granting the Company’s motion for summary judgment and denying the Wellstat Diagnostics Guarantors’ cross-motion for summary judgment.  The Supreme Court of New York held that the Wellstat Diagnostics Guarantors are liable for all “Obligations” owed by Wellstat Diagnostics to PDL.  It did not set a specific dollar amount due, but ordered that a judicial hearing officer or special referee be designated to determine the amount of the Obligations owing, and awarded PDL its attorneys’ fees and costs in an amount to be determined.  The Supreme Court of New York has also set a hearing on August 23, 2016 to consider the implication of the status quo ante instruction on certain actions of the Wellstat Diagnostics Guarantors and whether to issue a writ of attachment.
  • On August 2, 2016 the Delaware Bankruptcy Court announced its decision to grant PDL’s motion to dismiss the chapter 11 petition with prejudice as a bad faith filing, which should result in the receivership sale in the Maryland Circuit Court proceeding promptly.

Noden Transactions

  • On July 1, 2016, Noden Pharma DAC, a newly-formed company organized under the laws of Irelandpurchased 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 (collectively the “Noden Products”) and certain related assets and will assume certain related liabilities in exchange for the following cash commitments: $110.0 million paid on July 1, 2016, the closing date of the acquisition, $89.0 million payable on the first anniversary of the closing date and up to $95.0 million of additional cash consideration contingent on achievement of sales targets and the date of the launch of a generic drug containing the pharmaceutical ingredient aliskiren.
  • On July 1, 2016, PDL entered into an investment and stockholders’ agreement with Noden Pharma DAC and an affiliate and certain members of Noden’s management. PDL acquired an approximately 99% equity stake and obtained the majority voting power of Noden, for a total cash consideration of $75.0 million. It is expected that PDL’s equity ownership stake will ultimately be reduced to 88% upon the vesting of shares granted to Noden’s noncontrolling interest holders.
  • In addition to the initial $75.0 million cash equity contribution, PDL will make the following additional equity contributions to Noden and an affiliate: $32 million (and up to $89 million if Noden is unable to obtain debt financing) on July 1, 2017 to fund the anniversary payment and at least $38.0 million to fund a portion of certain milestone payments under the Noden Purchase Agreement, subject to their occurrence.
  • During the three and six month periods ended June 30, 2016, we recorded approximately $3.0 million in acquisition-related costs in connection with the Noden transactions. Noden is expected to reimburse PDL as part of the intercompany arrangement for all acquisition-related costs on or before December 31, 2016.
  • PDL has not yet finalized the purchase price allocation for this acquisition. We will include additional information about the fair value of acquired assets and assumed liabilities of the Noden Products in its Quarterly Report on Form 10-Q for the period ending September 30, 2016 and in our Form 8-K/A due to be filed within 71 days of the filing date of the Form 8-K with respect to the closing of the Noden transaction that was filed on July 6, 2016.
  • On July 1, 2016, Noden began earning profits on the sale of Tekturna, Tekturna HCT, Rasilez and Rasilez HCT. During the transitional service period we expect to receive monthly reporting from Novartis one month in arrears, that is, generally after Novartis has sold the Noden Products. We recognize revenue when we can reliably estimate such amounts and collectability is reasonably assured.

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.

Depomed, Inc.

  • We have reduced the fair market value of the Depomed royalty rights year to date 2016 by $55.3 million, primarily due to a reduction in Glumetza royalties received and a reduction in future cash flows due to lower projected demand data, greater erosion of market share due to the launch of a generic, and higher gross-to-net adjustments for Glumetza. As you will recall, Glumetza was marketed by Salix until its acquisition by Valeant.  Because we have limited information from Valeant, we employ an independent third party consulting group to assist us in our quarterly evaluation of Glumetza and the other Depomed products on which we receive or will receive royalties. In February 2016, a generic competitor to Glumetza launched as expected.  The impact of the generic on pricing and gross-to-net has been greater than typical generic models would predict.
  • PDL received a $6 million milestone for FDA approval of Jentadueto® XR in the second quarter of 2016. Jentadueto XR is the third approved product for which we will receive royalties from our Depomed royalty rights assets. We expect to begin receiving royalties on Jentadueto XR in the third quarter of 2016.
  • Since PDL’s acquisition of the Depomed royalty rights in October 2013, PDL has received $178.5 million in net cash payments.
  • PDL and Depomed are in the process of conducting a royalty audit on Glumetza royalties owed by Valeant.

Direct Flow Medical, Inc.

  • On July 15, 2016, PDL and Direct Flow Medical entered into the fifth Amendment and Limited Waiver to the Credit Agreement. PDL funded an additional $1.5 million to Direct Flow Medical in the form of a note with substantially the same interest and payment terms as the existing loans and a conversion feature whereby the $1.5 million loan would convert into equity of Direct Flow Medical upon the occurrence of certain events.
  • On February 26, 2016, PDL and Direct Flow Medical entered into the fourth Amendment to the Credit Agreement that converted a $5.0 million short-term secured promissory note into a loan under the credit agreement with substantially the same interest and payment terms as the existing loans, added a conversion feature whereby the $5.0 million loan would convert into equity of Direct Flow Medical upon the occurrence of certain events, and provided for a second $5.0 million convertible loan tranche commitment, to be funded at the option of PDL. The commitment for the second tranche was not funded and has since expired.
  • PDL has agreed to waive the liquidity covenant and delay the timing of the unpaid interest payments until September 30, 2016, and Direct Flow Medical agreed to issue to PDL a specified amount of warrants to purchase shares of convertible preferred stock on the first day of each month for the duration of the waiver period at an exercise price of $0.01 per share.
  • Direct Flow Medical is is currently attempting to raise equity.

kaleo, Inc.

  • On February 18, 2016, PDL was advised that Sanofi and kaléo will terminate their license and development agreement later this year.
  • On March 31, 2016, PDL was informed by kaléo that the license and development agreement was terminated and that all U.S. and Canadian commercial and manufacturing rights to Auvi-Q ® and Allerject ® had been returned to kaléo. All manufacturing equipment had also been returned to kaléo, and kaléo intends to evaluate the timing and options for bringing Auvi-Q and Allerject ® back to the market.
  • PDL entered into a secured note purchase agreement with Accel 300, a wholly-owned subsidiary of kaléo, which as of June 30, 2016, had a principal balance of $144.8 million due to PDL. Interest payments due have been paid on time and in full through the second quarter of 2016, and kaléo has indicated that it intends to make payments due to PDL under the note agreement until Auvi-Q is returned to the market.

ARIAD Pharmaceuticals, Inc.

  • In May of 2016, PDL and ARIAD agreed to amend the ARIAD Royalty Agreement, as a result of ARIAD’s share purchase agreement with Incyte Corporation (Incyte), to include royalties on net sales of Iclusig® (ponatinib) made by Incyte once it takes over ARIAD’s commercialization operations with respect to Iclusig in the European Union and certain other countries. In addition, the Company and ARIAD agreed to restructure future funding under the Royalty Agreement such that ARIAD’s option to draw up to an additional $100 million between January and July of 2016 was reduced to a maximum amount of up to an additional $40 million, which can be drawn at ARIAD’s option in July of 2017.
  • On July 28, 2016, PDL funded the second tranche of $50 million to ARIAD.  This agreement was entered into in July 2015, in exchange for royalties on the net revenues of Iclusig.  As a result of the second tranche payment, under the terms of the ARIAD Royalty Agreement, PDL’s royalty percentage will increase to 5.0% of the U.S. and European net revenues of Iclusig and 5.0% of the payments ARIAD receives elsewhere in the world until December 31, 2018.  Beginning January 1, 2019 and thereafter, the royalty rate will increase to 6.5% in all jurisdictions and continue until December 31, 2033, subject to a put option of PDL upon the occurrence of specified events and a call option of ARIAD.

 

Royalty Revenue by Product ($ in 000’s) *

Avastin Q1 Q2 Q3 Q4 Total
2016 38,825 38,825
2015 38,809 38,447 39,284 39,987 156,527
2014 38,122 38,924 38,864 40,723 156,632
2013 33,234 46,720 32,224 32,287 144,464
2012 23,215 41,670 25,955 30,041 120,882
2011 22,283 41,967 23,870 22,886 111,006
2010 16,870 44,765 29,989 24,922 116,547
2009 13,605 35,161 21,060 15,141 84,966
2008 9,957 30,480 19,574 12,394 72,405
2007 8,990 21,842 17,478 9,549 57,859
2006 10,438 15,572 15,405 12,536 53,952
Herceptin Q1 Q2 Q3 Q4 Total
2016 38,726 38,726
2015 37,875 39,476 39,457 38,897 155,704
2014 36,646 38,292 39,407 40,049 154,394
2013 30,287 47,353 30,961 33,038 141,640
2012 25,702 44,628 30,433 28,307 129,070
2011 25,089 42,209 31,933 21,812 121,042
2010 23,402 38,555 27,952 25,441 115,350
2009 16,003 32,331 26,830 18,615 93,779
2008 14,092 34,383 28,122 20,282 96,880
2007 19,035 28,188 22,582 14,802 84,608
2006 15,142 19,716 21,557 20,354 76,769
Lucentis Q1 Q2 Q3 Q4 Total
2016
2015 15,920 15,920
2014 17,390 16,777 16,883 16,695 67,746
2013 12,032 30,066 13,536 12,127 67,760
2012 10,791 27,938 12,552 11,097 62,377
2011 8,878 24,313 12,157 10,750 56,099
2010 7,220 19,091 10,841 8,047 45,198
2009 4,621 12,863 8,123 6,152 31,759
2008 3,636 11,060 7,631 4,549 26,876
2007 2,931 6,543 6,579 3,517 19,570
2006 289 3,335 3,624
Xolair Q1 Q2 Q3 Q4 Total
2016 13,030 13,030
2015 10,971 11,075 12,407 12,749 47,202
2014 8,886 9,099 10,442 11,237 39,663
2013 5,930 10,025 7,334 7,330 30,619
2012 5,447 8,609 6,504 6,145 26,705
2011 4,590 7,621 5,916 5,823 23,949
2010 3,723 6,386 4,980 4,652 19,741
2009 2,665 5,082 4,085 3,722 15,553
2008 1,488 4,866 3,569 2,927 12,850
2007 1,684 3,942 3,332 2,184 11,142
2006 2,263 2,969 3,041 2,495 10,768
Perjeta Q1 Q2 Q3 Q4 Total
2016 9,320 9,320
2015 6,596 7,419 7,898 8,753 30,666
2014 3,375 4,385 5,157 5,850 18,767
2013 340 1,414 748 879 3,381
2012 58 250 308
Kadcyla Q1 Q2 Q3 Q4 Total
2016 4,782 4,782
2015 3,852 4,177 4,319 4,535 16,883
2014 1,934 2,491 3,048 3,464 10,937
2013 551 830 859 2,240
Tysabri Q1 Q2 Q3 Q4 Total
2016 13,970 14,232 28,202
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
Actemra Q1 Q2 Q3 Q4 Total
2016
2015 4,990 4,990
2014 3,446 3,932 4,419 5,406 11,797
2013 2,631 2,816 2,939 3,744 12,131
2012 1,705 2,074 2,145 2,462 8,385
2011 913 1,136 1,401 1,460 4,910
2010 1,587 237 315 688 2,827
2009 585 537 909 1,197 3,228
2008 44 146 369 559
2007 32 17 49
2006
Gazyva Q1 Q2 Q3 Q4 Total
2016
2015 313 313
2014 51 283 325 436 1,094
Entyvio Q1 Q2 Q3 Q4 Total
2016
2015 2,223 2,223
2014 153 2,192 2,344

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

Q1 2014 royalty revenue by product above do not include a $5 million payment received from Genentech in Q1 2014 for a retroactive settlement payment from 2013.

Reported Net Sales Revenue by Product ($ in 000’s) *

Avastin Q1 Q2 Q3 Q4 Total
2016 1,827,081 1,827,081
2015 1,826,289 1,809,286 1,848,655 1,881,743 7,365,972
2014 1,786,912 1,838,764 1,828,900 1,916,353 7,370,929
2013 1,653,108 1,694,678 1,746,135 1,819,877 6,913,798
2012 1,502,757 1,573,727 1,551,327 1,662,977 6,290,788
2011 1,597,461 1,582,705 1,581,095 1,469,994 6,231,255
2010 1,506,788 1,596,892 1,594,707 1,646,218 6,344,605
2009 1,345,487 1,295,536 1,439,730 1,514,053 5,594,806
2008 980,715 1,084,930 1,180,427 1,239,382 4,485,454
2007 678,068 746,587 797,013 875,084 3,096,752
2006 439,318 516,052 570,551 592,897 2,118,817
Herceptin Q1 Q2 Q3 Q4 Total
2016 1,822,407 1,822,407
2015 1,789,404 1,857,696 1,856,803 1,830,424 7,334,326
2014 1,731,564 1,801,990 1,854,452 1,877,614 7,265,621
2013 1,681,574 1,744,145 1,681,860 1,726,551 6,834,130
2012 1,515,255 1,625,313 1,663,695 1,650,495 6,454,759
2011 1,391,568 1,559,975 1,642,898 1,432,771 6,027,211
2010 1,270,846 1,349,512 1,300,934 1,409,310 5,330,602
2009 1,210,268 1,133,993 1,226,435 1,278,626 4,849,323
2008 1,105,426 1,195,215 1,211,982 1,186,806 4,699,428
2007 891,761 949,556 979,602 1,015,033 3,835,952
2006 529,585 659,719 761,099 803,576 2,753,979
Lucentis Q1 Q2 Q3 Q4 Total
2016
2015 749,182 749,182
2014 818,376 789,483 794,503 785,669 3,188,031
2013 1,203,179 1,171,423 1,200,791 1,212,651 4,788,045
2012 1,079,092 1,086,543 1,097,541 1,109,695 4,372,871
2011 887,757 943,418 1,052,809 1,075,015 3,958,999
2010 721,967 698,890 745,376 804,684 2,970,917
2009 462,103 469,736 555,296 615,212 2,102,347
2008 363,615 393,682 460,167 454,922 1,672,386
2007 224,820 219,579 299,995 322,300 1,066,695
2006 10,689 157,742 168,431
Xolair Q1 Q2 Q3 Q4 Total
2016 613,160 613,160
2015 523,340 521,192 583,856 599,945 2,228,333
2014 425,243 428,171 491,372 521,726 1,866,512
2013 341,309 365,778 391,900 401,333 1,500,321
2012 310,234 314,638 347,796 340,431 1,313,100
2011 267,754 277,642 310,874 314,911 1,171,182
2010 228,859 225,878 251,055 263,389 969,179
2009 184,669 181,086 211,006 219,693 796,454
2008 137,875 169,521 177,179 183,753 668,329
2007 129,172 130,700 144,250 147,754 551,876
2006 95,241 99,354 112,608 118,002 425,204
Perjeta Q1 Q2 Q3 Q4 Total
2016 438,580 438,580
2015 310,410 349,125 371,668 411,912 1,443,115
2014 158,809 206,333 242,700 275,311 883,153
2013 34,008 55,076 66,353 87,949 243,386
2012 5,080 25,000 30,079
Kadcyla Q1 Q2 Q3 Q4 Total
2016 225,018 225,018
2015 181,275 196,556 203,258 213,404 794,493
2014 91,031 117,212 143,414 163,028 514,685
2013 21,459 73,626 85,906 180,991
Tysabri Q1 Q2 Q3 Q4 Total
2016 465,647 474,379 940,026
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
Actemra Q1 Q2 Q3 Q4 Total
2016
2015 166,338 166,338
2014 114,865 124,736 147,285 180,197 567,082
2013 87,703 91,374 97,961 124,815 401,852
2012 56,662 66,624 71,505 82,053 276,843
2011 30,433 35,370 46,709 48,671 161,183
2010 52,908 5,405 10,493 22,919 91,725
2009 19,504 17,920 30,313 39,888 107,625
2008 1,452 1,377 5,981 12,305 21,115
2007 1,137 1,137
2006
Gazyva Q1 Q2 Q3 Q4 Total
2016
2015 9,627 9,627
2014 3,095 8,697 11,531 13,428 36,750
Entyvio Q1 Q2 Q3 Q4 Total
2016
2015 59,287 59,287
2014 5,347 58,500 63,848

* 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.
August 2016