2017 Second Quarter Update

Dear Shareholder:

Following are some of the key points regarding PDL’s second quarter 2017 financial and business results.

Highlighted Financial Results from Q2 2017

  • Total revenues of $143.8 million and $189.3 million for the three and six months ended June 30, 2017, respectively.
  • GAAP diluted EPS of $0.39 and $0.42 for the three and six months ended June 30, 2017, respectively.
  • GAAP net income attributable to PDL’s shareholders of $60.4 million and $67.7 million for the three and six months ended June 30, 2017, respectively.
  • Non-GAAP net income attributable to PDL’s shareholders of $40.2 million and $53.5 million for the three and six months ended June 30, 2017.
  • PDL completed its $30 million share repurchase program, purchasing 13.3 million shares during the four-month period from the initial announcement in March 2017 through completion in June 2017.

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 second quarter of 2017 in the amount of $16.3 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.

Noden Pharma

  • Noden US is commercializing Tekturna® and Tekturna HCT® in the United States and Noden Pharma DAC, an Irish based company, assumed commercialization responsibilities for Rasilez® and Rasilez HCT® in the rest of the world in the second half of 2017. The products are indicated for the treatment of hypertension.
  • PDL repurchased it’s non-controlling interest in Noden and now owns 100% of Noden and continues to hold three of five board seats.
  • Noden and PDL are evaluating additional specialty pharma products in the form of optimized, established medicines, to acquire for Noden.
  • Noden net revenue for the quarter ended June 30, 2017 was $16.2 million, with $12.9 million in US revenue and $3.3 million in the rest of world.
    • Gross margins on the US revenue in the second quarter were approximately 81.0 percent.
    • The $3.3 million of revenue for the ex-U.S. is net of cost of goods and a fee to Novartis through its transition services agreement and will continue until marketing authorizations have been transferred.
  • Novartis and Noden Pharma DAC are working to transfer the marketing authorizations from Novartis companies to Noden Pharma DAC or to deregister the products.
    • These transfers (specifically EU, Switzerland, Canada and Japan) have been delayed per our original plan and are now expected to take place in the fourth quarter of this year.
    • Novartis has begun deregistering the product in countries in which the products have limited sales volumes and low operating margins.
  • Noden filed its NDA for the pediatric indication and formulation of Tekturna. Approval is estimated to be sometime in the first quarter of 2018 and if approved, would grant Tekturna and Tekturna HCT an additional six months of marketing exclusivity in the US.
  • Noden received a paragraph IV notice letter from Anchen Pharnaceuticals advising that Anchen had submitted an ANDA referencing Tekturna 150mg an 300mg tablets and containing certifications against U.S. Patent No. 8,617,595, which is listed in the Orange Book for Tekturna and expires on February 26, 2026. Noden filed a complaint for patent infringement in the US District Court of New Jersey against Anchen and Par Pharmaceuticals within 45 days from receipt of the paragraph IV notice letter.  As a result, Anchen’s ANDA is subject to a stay of approval for up to 30 months.  The proceeding is currently in the pre-trial phase.

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, 2016 and with changes to June 30, 2017 as reflected in our Balance Sheet:

(in thousands) Fair Value as of December 31, 2016 Change of Ownership Royalty Rights – Change in Fair Value Fair Value as of June 30, 2017
Depomed $ 164,070 $ $ 51,697 $ 215,767
VB 14,997 299 15,296
U-M 35,386 199 35,585
ARIAD 108,631 (108,169) (462)
AcelRx 67,483 4,304 71,787
Avinger 1,638 (503) 1,135
KYBELLA 10,113 (6,725) 3,388
$ 402,318 $ (108,169) $ (348) $ 342,958

The following table provides a summary of activity with respect to our royalty rights – change in fair value for the year ended June 30, 2017:

Cash Royalties Change in Fair Value Royalty Rights – Change in Fair Value
Depomed $ 41,767 $ 51,697 $ 93,464
VB 701 299 1,000
U-M 1,828 199 2,027
ARIAD 3,081 (462) 2,619
AcelRx 46 4,304 4,350
Avinger 610 (503) 107
KYBELLA 29 (6,725) (6,696)
$ 48,062 $ 48,809 $ 96,871

Updates on Royalty Rights Assets

Depomed, Inc.
  • To date (through June 30, 2017), we have received cash royalty payments of $253.1 million of the $240.5 million investment.
  • Glumetza (and authorized generic version) royalty: 50% of net sales less COGS continues so long as the products are being commercialized. PDL is auditing Valeant.
  • In July 2017, PDL received a royalty payment from Valeant in the amount of $6.6 million for royalties earned on sales of Glumetza for the month of June. The royalty payment included royalties related to the authorized generic version of Glumetza. This payment will be recorded as part of PDL’s third quarter of 2017 revenue.
  • Recent product approvals, Jentadueto XR, Invokamet XR and Synjardy XR have yielded $17 million in milestones in 2016 and started 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.

Notes Receivable

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

June 30, 2017 December 31, 2016
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 $ $ 51,315 $ 50,191 $ $ 52,260
Hyperion note receivable 1,200 1,200 1,200 1,200
LENSAR note receivable 43,909 43,900
Direct Flow Medical note 10,000 10,000
kaléo note receivable 146,654 143,591 146,685 142,539
CareView note receivable 19,148 19,300 18,965 19,200
Total $ 271,193 $ $ 215,406 $ 270,950 $ $ 269,099

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. On appeal, the appellate division of the NY court reversed on procedural grounds the portion of the decision granting PDL summary judgment, remanding the case to the trial division for a plenary action.  The action is currently before the NY trial court and in the pre-trial phase.  The parties will have the opportunity to conduct discovery and file dispositive motions prior to trial.  No trial date has been set yet.
Direct Flow Medical, Inc.
  • PDL initiated foreclosure proceedings in January 2017 which resulted in obtaining ownership of certain of the DFM assets through a wholly-owned subsidiary, DFM, LLC.
  • PDL wrote off $51.1 million of assets against ordinary income in Q4 2016.
  • YTD 2017, PDL monetized $8.1 million of those assets. PDL is in the process of monetizing the ex-China assets of DFM, LLC. The amount of which recovery, if any, is unknown at this time.
  • As of June 30, 2017 remaining foreclosed assets are recorded as assets held for sale with a carrying value of $1.9 million.
LENSAR Credit Agreement
  • LENSAR has emerged from bankruptcy, and LENSAR and PDL completed LENSAR’s financial restructuring with a court-approved exit plan finalized on May 11, 2017.
  • As a result of the restructuring, PDL converted most of its debt to an equity ownership position.
  • LENSAR is now a wholly-owned subsidiary of PDL, and PDL began consolidating LENSAR’s financial statements with PDL effective May 11, 2017.
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.
  • Auvi-Q returned to the market in February 2017 and third party reports suggest strong sales.
  • Evzio sales have been much stronger than projected so far. This is secondary source of repayment to PDL.
  • In the second quarter of 2017, PDL recognized and was paid $4.7 million in interest revenue from the kaléo note.
CareView Communications, Inc.
  • A second $20.0 million tranche was to be funded by PDL upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and financial targets and was to be accomplished no later than June 30, 2017. These milestones were not achieved, and there is no additional funding obligation due to CareView from PDL.
  • In the second quarter of 2017, PDL recognized and was paid $0.7 million in interest revenue from the CareView note.

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

Tysabri Q1 Q2 Q3 Q4 Total
2017 14,156 16,284 30,440
2016 13,970 14,232 14,958 15,513 58,673
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 471,877 542,761 1,014,638
2016 465,647 474,379 498,618 517,099 1,955,743
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 risks and uncertainties with respect to the Company’s business 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 2017