On-Going Transactions

AcelRX

This is a royalty transaction for $65 million that was entered into on September 18, 2015.  PDL acquired 75% of the royalty that Grünenthal pays to AcelRx for rights to commercialize Zalviso in European Union, Switzerland and Australia.

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.

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CareView

This is a debt transaction for $20 million that was entered into on June 26, 2015 and was funded on October 5, 2015 upon the attainment by CareVIew of a specified milestone. This tranche has a five-year maturity and pays interest at 13.5% quarterly in arrears.

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.

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Depomed

This is a royalty transaction for $240.5 million entered into on October 18, 2013 in which PDL acquired the rights to royalties and milestones on five products for the treatment of type 2 diabetes.

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.

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Direct Flow Medical

This a debt transaction for a total of $58 million that was entered into on November 5, 2013. PDL provided tranches of $35 million, $15 million, $5 million, $1.5 million and $1.5 million on November 5, 2013, November 10, 2014, January 26, 2016, July 15, 2016 and September 12, 2016, respectively.

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.

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Kybella

This is a royalty transaction for $9. 5 million that was entered into on July 8, 2016. There is the potential for additional payments of up to $1 million depending on the attainment of certain product sales targets. PDL acquired the rights of an individual to receive certain royalties on sales of Kybella by Allergan.

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.

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Lensar

This was a debt transaction that has since converted into an equity investment. LENSAR is now a wholly owned subsidiary of PDL. In 2015, certain of LENSAR’s assets were acquired by a subsidiary of Alphaeon, who also assumed $42 million worth of LENSAR’s outstanding debt owed to PDL and issued 1.2 million shares of Alphaeon’s Class A stock to PDL.

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.
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University of Michigan

This is a royalty transaction for $65.6 million that was entered into on November 6, 2014. PDL acquired 75% of the royalties due to the University of Michigan under its license agreement with Genzyme, a subsidiary of Sanofi. The term of this agreement runs until patent expiration, excluding any extension of the term of the patent.

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.

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Viscogliosi Brothers

This is a royalty transaction for $15.5 million entered into on June 26, 2014. PDL acquired all of the royalties payable on sales of the spinal implant, Coflex, of Paradigm Spine accruing after April 1, 2014 until such time as PDL has received 2.3 times the cash advanced or $35.65 million, after which all of the royalty rights revert to the Viscogliosi Brothers.

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.

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Wellstat Diagnostics

This is a hybrid royalty/debt transaction for $44 million initially entered into on November 2, 2012. PDL acquired from the Wohlstadters, the equity owners of Wellstat Diagnostics, the right to receive quarterly interest payments at the rate of 5% per annum (payable in cash or in kind) plus a low double digit royalty rate on Wellstat Diagnostics net revenues upon commercialization of its products.

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.

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.

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