2017 Fourth Quarter Update

Dear Shareholder:

Following are some of the key points regarding PDL’s fourth quarter and year-end 2017 financial and business results.

Highlighted Financial Results from Q4 2017

  • Total revenues of $68.0 million and $320.1 million for the three and 12 months ended December 31, 2017, respectively.
  • GAAP diluted EPS of $0.15 and $0.71 for the three and 12 months ended December 31, 2017, respectively.
  • GAAP net income attributable to PDL’s shareholders of $22.3 million and $110.7 million for the three and 12 months ended December 31, 2017, respectively.
  • Non-GAAP net income attributable to PDL’s shareholders of $24.8 million and $100.7 million for the three and 12 months ended December 31, 2017.
  • PDL had cash, cash equivalents, short-term investments and other investments of $532.1 million at December 31, 2017, compared to $242.1 million at December 31, 2016.
  • PDL’s portfolio of assets has a net book value of $5.54 per share.

Recent Developments

  • On February 1, 2018, PDL completed the retirement of the remaining $126.4 million of aggregate principal of its 4.0% Convertible Senior Notes due 2018 at their stated maturity by making a payment to the noteholders of $126.4 million, plus $2.6 million of accrued interest.

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

Tysabri®  (Approved royalty-bearing product relating to Queen et al. patents)
  • While the Queen et al. patents have expired and the resulting royalty revenue has dropped substantially since the first quarter of 2016, we continue to receive royalty revenue from one product under the Queen et al. patent licenses, Tysabri®, as a result of sales of the product that was manufactured prior to patent expiry. In November 2017, we were notified by Biogen that product supply for Tysabri that was manufactured prior to patent expiry, and for which we would receive royalties on, had been extinguished in the United States and was rapidly being reduced in other countries. As a result, we anticipate royalties from product sales of Tysabri to be substantially lower in 2018 and cease after the first quarter of 2019.
  • PDL recorded revenue of $4.5 million from Tysabri® in Q4 2017.
Noden Pharma
  • Noden US is commercializing Tekturna® and Tekturna HCT® in the United States and Noden Pharma DAC, an Irish based company, is assuming commercialization responsibilities for Rasilez® and Rasilez HCT® in the rest of the world, starting in the second half of 2017. The products are indicated for the treatment of hypertension.
  • PDL owns 100 percent of Noden and continues to hold three of five board seats.
  • Noden and PDL are evaluating additional pharma products in the form of optimized, established medicines, to acquire for Noden.
  • Noden net revenue for the quarter ended December 31, 2017 was $25.1 million, with $14.5 million in US revenue and $10.6 million in the rest of world.
    • Gross margins on the US revenue in the fourth quarter were 79 percent.
    • The $10.6 million of revenue for the ex-U.S. includes one month of net of cost of goods and a fee to Novartis through its transition services agreement and two months of revenue which excludes the Novartis profit transfer since EU and Switerland marketing authorizations have been transferred to Noden as of November 1, 2017.
    • As a result, we will see higher revenues (as ex-US revenue were previously reported net of COGS and fees from Novartis), but we will also see an increase in reported cost of sales. Noden’s overall goal is to maximize profits generated from its portfolio, and this led us to de-register the products in those few European countries where Rasilez was either not or only marginally profitable.  Although this has had a negative impact on revenue, it has improved operating margins.
  • In December of 2017, Noden entered into an agreement with Lee’s Pharmaceutical Holdings Ltd. granting them exclusive sales rights to Rasilez in China, Hong Kong, Macau and Taiwan, with guaranteed payments due to Noden. We had not forecasted sales in these territories during our acquisition of Rasilez, so this agreement represents an incremental opportunity. Also in December, Noden entered into an agreement with Orphan Pacific for the distribution of Rasilez in 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, 2017 and with changes from December 31, 2016 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 December 31, 2017
Depomed $ 164,070 $ $ 67,968 $ 232,038
VB 14,997 (617) 14,380
U-M 35,386 (8,617) 26,769
ARIAD 108,631 (108,169) (462)
AcelRx 67,483 5,411 72,894
Avinger 1,638 (1,242) 396
KYBELLA 10,113 (7,367) 2,746
$ 402,318 $ (108,169) $ 55,074 $ 349,223

The following table provides a summary of activity with respect to our royalty rights – change in fair value for the year ended December 31, 2017:

Cash Royalties Change in Fair Value Royalty Rights – Change in Fair Value
Depomed $ 97,644 $ 67,968 $ 165,612
VB 1,276 (617) 659
U-M 3,662 (8,617) (4,955)
ARIAD 3,081 (462) 2,619
AcelRx 120 5,411 5,531
Avinger 1,220 (1,242) (22)
KYBELLA 250 (7,367) (7,117)
$ 107,253 $ 55,074 $ 162,327

Updates on Royalty Rights Assets

Depomed, Inc.  To date (through December 31, 2017), we have received cash royalty payments of $308.5 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.
  • On October 27, 2017, PDL and Depomed, Inc. entered into a settlement agreement with Valeant Pharmaceuticals International, Inc. to resolve all matters addressed in the lawsuit filed by Depomed on September 7, 2017 relating to underpayment of royalties by Valeant. Under the terms of the Settlement Agreement, the litigation will be dismissed, with prejudice, and Valeant paid a one-time, lump-sum payment of $13.0 million.  The cash from the settlement agreement was received in Q4 2017.
  • 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:

December 31, 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 $ $ 51,308 $ 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 146,685 142,539
CareView note receivable 19,346 18,750 18,965 19,200
Total $ 70,737 $ $ 71,258 $ 270,950 $ $ 269,099

Updates on Notes Receivable

CareView
  • In February 2018, we entered into a modification agreement with CareView whereby we agreed, effective as of December 28, 2017, to modify the credit agreement before remedies could otherwise have become available to us under the credit agreement in relation to certain obligations of CareView that would potentially not be met, including the requirement to make principal payments. Under the modification agreement we agreed that (i) a lower liquidity covenant would be applicable and (ii) principal repayment would be delayed for a period of up to December 31, 2018. In exchange for agreeing to these modifications, among other things, the exercise price of our warrants to purchase 4.4 million shares of common stock of CareView was reduced and, subject to the occurrence of certain events, CareView agreed to grant us additional equity interests.
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.
  • In September 2017, Wellstat Therapeutics, one of the Wellstat Guarantors,  obtained a decision against BTG International, Inc. in a breach of contract case which set the damages at $55.8 million plus interest and fees.  Wellstat Therapeutics will only receive the award in a final court decision or settlement between the parties, and BTG has appealed the decision.
  • On February 6, 2018, the NY Court issued an order from the bench which enjoins the Wellstat Guarantors from selling, encumbering, removing, transferring or altering the collateral, and further precludes PDL from foreclosing on certain collateral during the pendency of the case. The Guarantors have not yet posted the required $300,000 bond to implement the injunction on PDL’s foreclosure.

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
Chief Executive Officer
PDL BioPharma, Inc.
March 2018