2018 Second Quarter Update

Dear Shareholder:

Following are some of the key points regarding PDL’s Second quarter 2018 financial and business results.

Highlighted Financial Results from Q2/2018

  • Total revenues of $46.6 million.
  • GAAP net loss attributable to PDL’s shareholders of $112.3 million or $(0.76) per diluted share.
  • GAAP net loss includes a one-time $133.3 million, net of tax, non-cash accounting charge related to the impairment of an intangible asset from Noden Pharma DAC, due to the increased probability of a generic version of aliskiren being launched in the United States, offset by a $19.7 million, net of tax, non-cash decrease in the fair value of the contingent liability related to a reduced estimate of the probability in paying milestones to Novartis for Tekturna®.
  • Non-GAAP net income attributable to PDL’s shareholders of $14.7 million.
  • Cash, cash equivalents, short-term investments and other investments of $395.7 million as of June 30, 2018.

Recent Developments

  • Stock Repurchase Program

In early July, the Company completed the $25.0 million share repurchase program by repurchasing approximately 0.6 million shares of its common stock at a weighted average price of $2.44 per share for a total of $1.4 million. The total amounts repurchased by the Company under the share repurchase program equal approximately 8.7 million shares of its common stock for an aggregate purchase price of $25.0 million, or an average cost of $2.89 per share, including trading commissions.

  • Depomed Royalty Rights

In August 2018, the Company amended the Royalty Purchase and Sale Agreement (the “Royalty Agreement”) with Depomed, under which the Company acquired all of Depomed’s remaining rights to royalties and milestones payable on sales of type 2 diabetes products licensed by Depomed for $20.0 million. Under the original Royalty Agreement, the Company would have shared future royalties equally with Depomed after total cash received by the Company reached $481.0 million, or two times the Company’s original investment, which the Company expects to occur by October 2020.

Noden Pharma
  • Noden US is commercializing 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, starting in November 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 to acquire for Noden.
  • Noden net revenue for the quarter ended June 30, 2018 was $25.9 million, with $10.4 million in US revenue and $15.5 million in the rest of world, compared to $16.2 million for the same period in 2017.
    • Noden product revenues increased 60 percent and accounted for approximately 56 percent of total revenues compared to approximately 11 percent in the second quarter of 2017.
    • Gross margins on revenue in the second quarter were 58 percent, 92 percent in the U.S. on Tekturna and Tekturna HCT and 35 percent ex-U.S. on Rasilez and Rasilez HCT.
    • 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 June 2018, Noden Pharma DAC entered into a settlement agreement with Anchen Pharmaceuticals, Inc. 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 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, but is not permitted to commercialize a copy of Tekturna. Anchen is the sole ANDA filer for aliskiren of which the Company is aware.
    • Based upon the patent settlement, Noden evaluated the ongoing value of the Noden asset group based upon the probability of a market entry by Anchen with a generic version of aliskiren in the United States and the associated cash flows and conducted a test for impairment.
    • Due to the increased probability of a generic version of aliskiren being launched in the United States in 2019 the Company revised its estimates of future revenues and as a result of this analysis determined that the sum of undiscounted cash flows was not greater than the carrying value of the assets
    • Noden determined that long-lived assets with a carrying amount of $192.5 million were no longer recoverable and were in fact 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 as of June 30, 2018. This write-down is included in “Impairment of intangible asset” on the Condensed Consolidated Statements of Income. As of June 30, 2018, the remaining Noden Products intangible asset balance is $40.1 million and will be amortized straight-line over the remaining life of 8 years.
    • Offsetting the impairment was a $22.5 million decrease in fair value of the contingent liability related to reduced estimate in the probability in paying milestones to Novartis for Tekturna.
LENSAR
  • LENSAR Laser System revenue for the for the quarter ended June 30, 2018 was $5.9 million. PDL did not begin recognizing revenue from LENSAR until May 2017.
  • Gross margins on LENSAR revenue in the second quarter were 37 percent.

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 June 30, 2018 and with changes from December 31, 2017 as reflected in our Balance Sheet:

(in thousands) Fair Value as of December 31, 2017 Royalty Rights – Change in Fair Value Fair Value as of June 30, 2018
Depomed $ 232,038 $ (17,967) $ 214,071
VB 14,380 284 14,664
U-M 26,769 (620) 26,149
AcelRx 72,894 4,539 77,433
Avinger 396 (396)  –
KYBELLA 2,746 100 2,846
$ 349,223 $ (14,060) $ 335,163

The following table provides a summary of activity with respect to our royalty rights – change in fair value for the three and six months ended June 30, 2018:

 

Three Months Ended
June 30, 2018
Cash  Change in Fair Value Royalty Rights – Change in Fair Value
Depomed $ 17,689 $ (8,535) $ 9,154
VB 263 147 410
U-M 1,289 (434) 855
AcelRx 68 2,301 2,369
Avinger 61 (101) (40)
KYBELLA  – 94 94
$ 19,370 $ (6,528) $ 12,842

 

Six Months Ended
June 30, 2018
Cash  Change in Fair Value Royalty Rights – Change in Fair Value
Depomed $ 34,597 $ (17,967) $ 16,630
VB 543 284 827
U-M 2,284 (620) 1,664
AcelRx 120 4,539 4,659
Avinger 366 (396) (30)
KYBELLA 83 100 183
$ 37,993 $ (14,060) $ 23,933

Updates on Royalty Rights Assets

PDL received $19.4 million in net cash royalties from its royalty rights in the second quarter of 2018, compared to $34.6 million for the same period of 2017;

Depomed, Inc.  To date (through December 31, 2017), we have received cash royalty payments of $343 million from the $240.5 million investment.

  • Glumetza (and authorized generic version) royalty: 50% 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® and 2026 for Jentadueto XR® and Synjardy XR®.

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.
  • PDL recorded revenue of $1.2 million from Tysabri in Q2 2018.
  • Royalties from PDL’s licensees to the Queen et al. patents were $15.1 million lower than in the second quarter of 2017 as product supply of Tysabri manufactured prior to patent expiry in the United States have been extinguished and ex-U.S. product supplies are rapidly being exhausted.

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, 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 $ 57,224 $ 50,191 $ 51,308
Hyperion note receivable 1,200 1,200 1,200 1,200
CareView note receivable 19,496 19,507 19,346 18,750
Total $ 70,887 $ 77,931 $ 70,737 $ 71,258

 

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

Tysabri Q1 Q2 Q3 Q4 Total
2018 2,783 1,218 4,001
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 40,602 133,371
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,

John P. McLaughlin
Chief Executive Officer
PDL BioPharma, Inc.
August 2018