2018 Fourth Quarter Update

Dear Shareholder:

Following are some of the key points regarding the fourth quarter 2018 financial and business results for PDL BioPharma, Inc. (“PDL” or “the Company”).

Highlighted Financial Results from Q4 2018

  • Total revenues of $45.1 million.
  • GAAP net income attributable to PDL’s shareholders of $16.3 million or $0.11 per diluted share.
  • Non-GAAP net income attributable to PDL’s shareholders of $15.1 million.
  • Cash and cash equivalents of $394.6 million as of December 31, 2018.
  • As authorized in September 2018, PDL initiated a $100.0 million share repurchase program. The Company purchased 8.7 million shares of common stock in the open market during the fourth quarter for 2018 of $25.5 million.

Recent Developments

  • Authorized Generic

On March 4, 2019, the Company announced the U.S. commercial launch of an authorized generic of Tekturna®, aliskiren hemifumarate 150 mg and 300 mg tablets, with the same drug formulation as Tekturna. The launch is being carried out by Prasco, LLC, under an agreement with the Company’s wholly-owned subsidiary, Noden Pharma USA, Inc.

  • Stock Repurchase Programs

On September 21, 2018, the PDL’s board of directors authorized the repurchase of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $100.0 million pursuant to a new share repurchase program. As of December 31, 2018, the Company had repurchased 8.7 million shares of its common stock under the $100.0 million share repurchase program for an aggregate purchase price of $25.5 million, or an average cost of $2.94 per share, including trading commissions.

  • Since initiating its first stock repurchase program in March 2017 through March 14, 2019, the Company has used $116.0 million to repurchase a total of 41.5 million shares of its common stock.

Noden Pharma

  • Beginning in November 2017, Noden Pharma US assumed commercialization of Tekturna and Tekturna HCT® in the United States and Noden Pharma DAC, an Ireland based company, assumed commercialization responsibilities for Rasilez® and Rasilez HCT® in the rest of the world. The products are indicated for the treatment of hypertension.
  • Noden and PDL are evaluating additional pharma products to acquire for Noden.
  • Noden net revenue for the quarter ended December 31, 2018 was $18.8 million, with revenue of $9.8 million in U.S. and $9.0 million in the rest of world, compared with $25.1 million for the same period in 2017.
    • Noden product revenues decreased 25 percent and accounted for approximately 42 percent of total revenues compared with approximately 37 percent in the fourth quarter of 2017.
    • Gross margins on revenue in the fourth quarter were 57 percent, 89 percent in the U.S. on Tekturna and Tekturna HCT and 21 percent ex-U.S. on Rasilez and Rasilez HCT.
    • In June 2018, Noden Pharma DAC entered into a settlement agreement with Anchen Pharmaceuticals, Inc. (“Anchen”) and its affiliates to resolve the patent litigation relating to Anchen’s Abbreviated New Drug Application (“ANDA”) seeking approval from the U.S. Food and Drug Administration (“FDA”) to market a generic version of aliskiren.  Under the settlement agreement, Anchen agreed to not commercialize its generic version of aliskiren prior to March 1, 2019. Anchen not permitted to commercialize a copy of Tekturna. PDL is not aware of Anchen’s plans for, or the timing of a launch of, a generic version of aliskiren or of any other ANDA applications referencing Tekturna.
    • Due to the increased probability of a generic version of aliskiren being launched in the U.S. in 2019, Noden determined that long-lived assets with a carrying amount of $192.5 million were impaired and wrote them down to their estimated fair value of $40.1 million, resulting in a non-cash pre-tax impairment charge of $152.3 million in the second quarter of 2018. This write-down is included in “Impairment of intangible assets” on the Consolidated Statement of Operations for the year ended December 31, 2018. Offsetting the impairment was a $41.6 million decrease in fair value of the contingent liability primarily related to the reduced estimate in the probability in paying milestones to Novartis for Tekturna, including $19.2 million recognized in the fourth quarter of 2018.
    • As of December 31, 2018, the remaining balance of Noden Products intangible assets is $37.6 million and is being amortized straight-line over a remaining life of 8 years.

LENSAR

  • LENSAR Laser System revenue for the quarter ended December 31, 2018 was $7.2 million, compared with $7.5 million for the quarter ended December 31, 2017.
  • Gross margins on LENSAR revenue in the fourth quarter were 53 percent.

Income Generating Assets

Royalty Rights Assets

PDL received $20.9 million in net cash royalties from its royalty rights in the fourth quarter of 2018, compared with $32.8 million for the prior year period.

Assertio (formerly Depomed, Inc.)

  • To date (through December 31, 2018), we have received cash royalty payments of approximately $380 million from the $240.5 million investment.
  • Glumetza (and authorized generic version) royalty: 50 percent of net sales less COGS continue so long as the products are being commercialized.
  • Low- to mid-single digit royalties to PDL on new product approvals expected to continue to 2023 for Invokamet XR®S., 2026 for Jentadueto XR® and Synjardy XR®, and 2027 for Invokamet XR® ex-US.

The following table provides additional details with respect to the fair value of the PDL royalty rights assets as of December 31, 2018 and with changes from December 31, 2017 as reflected in our Balance Sheet:

(in thousands) Fair Value as of December 31, 2017 Purchase of Royalty Assets  Royalty Rights – Change in Fair Value Fair Value as of December 31, 2018
Assertio (formerly Depomed)  $ 232,038  $ 20,000 $ 12,333 $ 264,371
VB 14,380 (272) 14,108
U-M 26,769 (1,174) 25,595
AcelRx 72,894 (2,514) 70,380
Avinger 396 (396)  —
KYBELLA 2,746 (690) 2,056
 $ 349,223  $ 20,000  $ 7,287  $ 376,510

The following table provides a summary of activity with respect to our royalty rights – change in fair value for the three and twelve months ended December 31, 2018:

Three Months Ended
December 31, 2018
(in thousands) Cash Royalties Change in Fair Value Royalty Rights – Change in Fair Value
Assertio (formerly Depomed) $ 19,425 $ (1,331) $ 18,094
VB 242 222 464
U-M 1,194 (1,929) (735)
AcelRx 59 2,105 2,164
KYBELLA (847) (847)
$ 20,920 $ (1,780) $ 19,140

 

Twelve Months Ended
December 31, 2018
(in thousands) Cash  Change in Fair Value Royalty Rights – Change in Fair Value
Assertio (formerly Depomed) $ 71,502 $ 12,333 $ 83,835
VB 1,062 (272) 790
U-M 4,631 (1,174) 3,457
AcelRx 249 (2,514) (2,265)
Avinger 366 (396) (30)
KYBELLA 159 (690) (531)
$ 77,969 $ 7,287 $ 85,256

Notes Receivable

CareView Communications, Inc.

  • In December 2018, the Company modified the loan by agreeing that (i) lower liquidity covenant would be applicable, (ii) the first principal payment would be deferred until January 31, 2019, and (iii) the scheduled interest payment due December 31, 2018 would be deferred until January 31, 2019.
  • The principal repayment and interest payment were subsequently deferred until March 31, 2019 under additional amendments.
  • In December 2018, and in consideration of the further modification to the credit agreement, the Company completed an impairment analysis and determined that the note was impaired and recorded an impairment loss of $8.2 million.

The following table presents the carrying value and the fair value of our notes receivable investments by level within the valuation hierarchy:

December 31, 2018 December 31, 2017
Carrying Value Fair Value Level 3 Carrying Value Fair Value Level 3
(In thousands)
Assets:
Wellstat Diagnostics note receivable $ 50,191 $ 57,322 $ 50,191 $ 51,308
Hyperion note receivable 1,200 1,200 1,200 1,200
CareView note receivable 11,458 11,458 19,346 18,750
Total $ 62,849 $ 69,980 $ 70,737 $ 71,258

Royalty-bearing products relating to Queen et al. Patents

Tysabri®

  • The Queen et al. patents have expired, and the resulting royalty revenue has dropped substantially since the first quarter of 2016.
  • PDL recorded revenue of $2 thousand from Tysabri in the fourth quarter of 2018.
  • Royalties from PDL’s licensees to the Queen et al. patents were significantly lower than in the fourth quarter of 2017 as product supply of Tysabri manufactured prior to patent expiry in the U.S. have been extinguished and ex-U.S. product supplies were rapidly being exhausted. As a result, we do not expect any further royalties from product sales of Tysabri after the fourth quarter of 2018.

 

 

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

Tysabri Q1 Q2 Q3 Q4 Total
2018 2,783 1,218 533 2 4,536
2017 14,156 16,284 1,443 4,531 36,414
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

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

Tysabri Q1 Q2 Q3 Q4 Total
2018 92,769 40,602 17,738 80 151,189
2017 471,877 398,382 194,563 177,379 1,242,201
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 licensee. Dates in above charts reflect when PDL receives royalties on sales. Sales occurred in the quarter prior to the dates in the above charts.
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 reports filed with the Securities and Exchange Commission. 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,


Dominique Monnet
President & Chief Executive Officer
PDL BioPharma, Inc.
March 2019