On-Going Transactions

As part of the transaction, PDL also receives 80% of the first four commercial milestones.  PDL’s right to receive the above payments runs until the earlier of: (i) PDL receives three times the cash paid to AcelRx or $195 million; or (ii) the expiration of the licensed patents. PDL believes that the licensed patents will expire in January 2032.

Zalviso is a combination drug (sufentanil) and device product used the for the treatment of moderate-to-severe post-operative pain in the hospital setting.  Sufentanil is a synthetic opioid drug that is more potent than its parent drug, fentanyl, and much more potent than morphine. Zalviso was approved by the European Union in September 2015 and Grünenthal launched the product in the second quarter of 2016. PDL began receiving royalties on the product in the third quarter of 2016.

As part of the transaction, PDL received a warrant to purchase approximately 4.4 million shares of common stock of CareView at an exercise price of $0.45, a price which had been reduced to $0.40 per share in a subsequent amendment to the agreement that also modified certain definitions.

The CareView system provides video and virtual bed rails to passively monitor hospital patients at risk of falling.

The basket of five products are: Glumetza (extended-release metformin), which is approved and commercialized by Valeant; Janumet XR (DPP-IV inhibitor + extended-release metformin), which is approved and commercialized by Merck; Jentadueto XR (DPP-IV inhibitor + extended-release metformin), which is approved and commercialized by Boehringer Ingelheim and Eli Lilly; Invokamet XR (SGLT2 inhibitor + extended-release metformin), which is approved and commercialized by Janssen; Synjardy XR (SGLT2 inhibitor + extended-release metformin), which is approved and commercialized by Boehringer Ingelheim and Eli Lilly; and LG Life Sciences and Valeant for sales of extended–release metformin in Korea and Canada, respectively.

Under the terms of the Depomed agreement, PDL receives all royalties and milestone payments until it has received two times the cash advanced or $481 million after which all payments are split between PDL and Depomed. The agreement terminates on the third anniversary following the latter of: (i) October 25, 2021; or (ii) no royalty payments are payable under any license agreement and each of the license agreements have expired based on its terms. Because the terms and termination dates vary by agreement, it is worth describing them individually.

Glumetza
Royalty on net sales of 32% in 2013 and 2014, 34.5% in 2015 until first generic entrant which occurred in February 2016, and 50% of gross profits (net sales less COGS) after first generic entrant. This split runs until the termination of the overall Depomed agreement which we estimate could be late 2029.

Janumet XR
Very low single digit royalty on net sales in the US through 2013 and 2014 which drops by 50% after 2014 and ended in the US in September 2016 and is expected to end ex-US in September 2018.

Jentadueto XR
In May 2016, the FDA approved Jentadueto XR and PDL received a $6 million milestone payment. Boehringer Ingleheim pays and PDL receives a royalty in the low to mid-single digit range which we expect to expire in 2026.

Invokamet XR
In September 2016, the FDA approved Invokamet XR and PDL received a $5 million milestone payment. Jannsen pays and PDL receives a royalty in the low to mid-single digit range which we expect to expire in 2023.

Synjardy XR
In December 2016, the FDA approved Synjardy XR and PDL received a $6 million milestone payment. Boehringer Ingleheim pays and PDL receives a royalty in the low to mid-single digit range which we expect to expire in 2026.

The loans made in 2016 provided funding for the company while it sought to raise additional equity, an effort that proved to be ultimately unsuccessful. All of the monies advanced by PDL were secured by the assets of Direct Flow Medical. In 2016, PDL wrote off approximately $51 million of the $61 million owed by Direct Flow Medical investment (principal + interest owed). This offset $18 million in taxes that would have otherwise been due. In late December 2016, Direct Flow Management began a foreclosure process at the conclusion of which PDL assumed control of its assets on January 20, 2017. Shortly thereafter, on January 2017, PDL concluded a transaction with a Chinese pharmaceutical company for rights to the intellectual property and products of Direct Flow Medical in China plus some manufacturing equipment for $7.5 million. PDL is in the process of monetizing the remaining intellectual property and know-how assets of Direct Flow Medical.

Direct Flow Medical has a transcatheter aortic valve system to treat aortic stenosis with minimal risk of aortic regurgitation, a significant clinical complication, and was developing a transcatheter mitral valve system.

Royalties are 20% of net sales of Auvi-Q and 10% of net sales of Evzio. The final maturity of the notes is June 2029, although kaléo has the right to redeem the notes at any time subject to a redemption premium. As part of this debt transaction, kaléo was required to use $20 million of the $150 million provided to establish an interest reserve account to cover any shortfalls in interest payments. That interest reserve account was depleted in the second quarter of 2016, due to the withdrawal from the market of Auvi-Q, as explained below. kaléo has continued to make all interest payments due in a timely manner.

Auvi-Q is a drug and device combination product in which the compact device uses an automatic needle retractor and voice instructions to assist in the proper delivery and administration of epinephrine to patients suffering severe allergic reactions, such as anaphylactic shock to peanuts. Auvi-Q was licensed exclusively to Sanofi which manufactured and commercialized the product until October 28, 2015 when it recalled all of the product immediately due to a manufacturing defect which resulted in an inadequate dosing of the drug in some instances. On February 18, 2016, Sanofi and kaléo terminated the exclusive license agreement and all rights to Auvi-Q reverted to kaléo. On October 26, 2016, kaléo announced that it will reintroduce Auvi-Q to the US market in the first half of 2017. kaléo indicated that the reasons for the recall have been resolved by investing in an extensive new, automated manufacturing process that uses a production line composed entirely of robots with more than one hundred quality checks. In January 2017, kaléo began commercializing Auvi-Q with its own sales force and product shipments commenced on February 14, 2017.

Evzio is similar except the drug delivered is naloxone which is used to counteract the effects of an opioid overdose, such as respiratory depression which can lead to death. Evzio is manufactured and commercialized by kaléo which has a dedicated sales force for this product.

PDL began to receive royalty payments in the third quarter of 2016. This agreement extends until February 5, 2025.

Kybella was approved in the United States on April 29, 2015 for the treatment of adults with moderate-to-severe submental fat, which is fat below the chin.

In December 2016, LENSAR re-acquired these assets from Alphaeon and later filed for Chapter 11 bankruptcy under a plan supported by PDL. LENSAR emerged from bankruptcy in May 2017, as a wholly-owned subsidiary of PDL. LENSAR is a medical device company. Its product is a femtosecond laser for refractive cataract surgery which uses augmented reality to provide superior imaging of the patient’s eye allowing efficient, precise and better placed corneal incisions. The LENSAR Laser System is approved in most major countries.

PDL estimates that the patent will expire in April 2022. Sanofi manufactures and commercializes Cerdelga, the sales of which generate the royalties due to the University of Michigan, 75% of which were acquired by PDL.

Cerdelga is an oral therapy for adult patients with Gaucher disease type 1, a rare genetic disorder which results in insufficient production of an enzyme. Prior to Cerdelga’s approval, most patients with Gaucher disease type 1 required weekly infusions on an enzyme to treat this condition. Because Cerdelga is a capsule and the recommended dosage for most patient is twice a day, it affords Gaucher disease patients greater convenience than weekly infusions.

Cerdelga is approved in most major countries, although pricing and reimbursement decisions have lagged behind approvals in certain countries in the European Union in particular.

In addition, the Viscogliosi Brothers have the right to repurchase the royalty for a specified amount up to and including June 26, 2018.

For additional information on Coflex, the spinal implant of Paradigm Spine, please see that transaction.

This transaction replaced two earlier debt facilities of $7.5 million in March 2012 which was increased to $10 million in August 2012 and repaid from the proceeds of the larger transaction. In January 2013, PDL was informed that Wellstat Diagnostics had breached the loan agreement by using funds contrary to the terms of said loan agreement. In January 2013, PDL sent a notice of default and accelerated all amounts due. Since that time, there have been a number of modifications to the original loan documents, the appointment of a receiver to protect the assets of Wellstat Diagnostics, the filing of court actions to protect PDL’s interests and the advancement of certain sums by PDL during a process to sell Wellstat Diagnostics. These events are detailed in PDL’s <a href=”#”>most recent SEC filings</a>. [link here to 10-k]

The more recent legal actions include proceedings before the Supreme Court of New York in which PDL is asserting its claims against the Wohlstadters and some of their companies who were guarantors to the loan. In addition, PDL intends to foreclose on certain real estate assets owned by the Wohlstadters in Virginia. .

PDL has determined that this loan is impaired and ceased accruing interest revenue. The current carrying value of the debt is $50.2 million, while the combination of sums advanced and sums owed (in terms of interest and specified rates of return) under the modified loan agreements significantly exceed that amount.