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PDL Biopharma Inc (PDLI)
Q1Â 2019 Earnings Call
May. 9, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello and welcome to the PDL BioPharma Quarterly Conference Call. At this time all participants are in a listen-only mode. Following management's prepared remarks we'll hold a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded Thursday, May 9, 2019.
I would now like to turn the conference over to Jody Cain. Please go ahead.
Jody Cain -- Investor Relations
This is Jody Cain with LHA. Thank you for participating in today's call. Please note that a slide presentation to accompany management's prepared remarks is available in the Investor Relations section of the PDL website at pdl.com.
Joining me today from PDL BioPharma are Dominique Monnet President and CEO; and Pete Garcia, the company's Chief Financial Officer.
Please turn to slide 2 and let me remind you that during this call management will be making forward-looking statements regarding the company's financial performance and other matters, and actual results may differ materially from those expressed in or implied by the forward-looking statements. Factors that may cause differences between current expectations and actual results are described in the company's SEC filings which are available at sec.gov and in the Investor Relations section of pdl.com.
The forward-looking statements made during this call should be considered accurate only as of the date of the live broadcast May 9, 2019. Although the company may elect to update forward-looking statements from time to time in the future, the company specifically disclaims any duty or obligation to do so even as new information becomes available or other events occur in the future.
I'd now turn the call over to Dominique Monnet. Dominique?
Dominique Monnet -- President & Chief Executive Officer
Thanks Jodi. Good afternoon everyone and thanks for joining us. Before we begin to review our Q1 financial and operational results, I'm pleased to start the call by highlighting our recent equity business in Evofem Biosciences. As you have likely read, in April we invested $30 million in the first tranche of a planned $60 million transaction and we currently own just under 20% of the outstanding share. We are in the process of completing additional due diligence prior to exercising our rights on the second tranche also in the amount of $30 million by June 10th. If we were to exercise our right to complete the full transaction we expect to earn approximately 30% of Evofem's equity capital. This ownership position may increase further if we exercise variance currently with each investment tranche.
We are excited about this equity investment hitting 75 the toughest strategy transaction we seek to apply our capital and our expertise to enable talented teams and promising product to achieve quite a potential, thereby creating attractive value for our shareholders.
Turning to slide 3. And we suggest a brief background in Evofem. Evofem is a publicly traded company developing innovative products for women's sexual and reproductive health. It leads investigational drug product Amphora is an on-demand non-hormonal gel contraceptive. Evofem initially submitted on prior to the U.S. FDA for approval in 2015 based on positive results from a Phase 3 trial. The company received a complete response letter due to disparity in efficacy results from clinical sites in Russia versus those in other geographies. The Evofem proceeded to run another Phase 3 study called AMPOWER exclusively at sites in the U.S.
The results of the AMPOWER study reported by in Evofem in December 2018 showed that Amphora made the primary endpoint of prevention of pregnancy at a favorable safety profile and was well tolerated. Evofem plans to resubmit the NDA during the fourth quarter of this year and it could range from commercial product launch in the U.S. in the first quarter or in the first half of 2020 subject of course to FDA approval.
Turning to slide 4. Let me share some of the reasons that led to our decision to make our initial investment in Evofem. First we like the therapeutic space. We previously certified women's healthcare as an area of strategic interest because it presents a significant and met medical needs that unfortunately have been underserved by large pharmaceutical companies. Evafem is pursuing a compelling vision of bringing novel solutions to advance health of women worldwide. We believe that its first asset Amphora is poised to deliver on the addition. Second, we like Evofem team, while PDL has a proven capability to establish a commercial organization from scratch, it is a hard and time consuming thing to do with much rather risk on an existing team (Technical Difficulty).
Evofem is led by strong talented highly experienced management team with a track record of successful clinical and commercial execution in the women's health space. CEO, Saundra Pelletier is an accomplished pharmaceutical leader. He is a passionate advocate for women health issues and as example, an impressive team that has the talent, expertise and commitment to succeed.
Third we like the asset. Amphora fits well with our strategic focus of being a late-stage novel solution to an underserved medical need with attractive near term commercial potential. Amphora provides women with a non-hormonal on-demand contraceptive which makes it an attractive choice for women who are reluctant to use a hormonal contraceptive. The addressable market is considerable. In the United States alone it is estimated that 16 million women who are sexually active are not using a contraceptive method. But do not want to get pregnant. This includes women who cannot or will not use hormonal contraception which is a primary population that Amphora is expected to serve. Market research shows that Amphora may also appear to women who are currently using hormonal contraception but are concerned about the side effects of the long-term impact of hormones. These women may also reckon a hormone free on-demand method.
From the U.S. payer standpoint we are aligned with Evofem's belief that Amphora will be widely reimbursed as a stand-alone contraception method with low or no copay to the requirements (Technical Difficulty).
Last but not least Amphora holds potential for label expansion. Evofem recently completed enrollment in a landmark Phase IIb clinical trial of Amphora for the prevention of chlamydia and gonorrhea. Fourth we like the structure of this transaction. It enables us to use our capital to add value. In this transaction our capital investment is expected to be applied to some Evofem's planned activity including finalizing development and preserving for the commercialization of Amphora. The two tranche structure this year allows us to begin working with Evofem right away while we complete additional due diligence in anticipation of the second tranche payment. It served well Evofem's needs while enabling us to walk before we run.
And lastly if we are to complete the full transition PDL expects to have a role in actively managing this investment. As PDL becomes one of Evofem's largest stockholders, I will take a seat on the Evofem's Board of Directors. We will also be allowed to designate a non working boarded server. We are very aligned strategically with Evofem leadership team and Board, and we look forward to partnering with them to give the commercial structure and to execute the launch of Amphora. I am pleased to report that in the short time that we have been working together, we have established a very constructive relationship.
I want to acknowledge our team at PDL for bringing this transaction to fruition.They continue to review in new areas of opportunity and consider broad range of investment options in building our portfolio.
Turning to slide 5. We remain deliberate in our selection of target opportunities and we are highly disciplined in our diligence process. There were a number of factors that gave PDL an edge in capitalizing on this opportunity: First our liquid balance sheet allowed us to quickly deploy on this tranche; second our experience and speed enabled us to be credible in the negotiation with Evofem; and third, we were flexible in our deal structure, whether adhering to its strict acquisition or licensing blueprint related to start with a minority investment. Assuming our diligence is completed satisfactorily we intend to make additional investments to fund the successful launch and further development of Amphora. In that process we could progressively increase our ownership position and take an even greater role in enabling Evofem to deliver on this vision to be a success as a leading women's health company.
Moving on to slide 6. Let me provide a brief overview of the transaction terms. As described on -- in our April 11th press release, if this transaction is fully completed, PDL will make a total investment in Evofem of $60 million. In tranche one, we invested $30 million and returned approximately 6.7 million shares of Evofem's common stock and warrants to purchase up to approximately 1.7 million shares of common stock as an exercised price of $6.38 per share. These warrants are exercisable for seven years beginning six months attrition date so we can exercise these warrants any time after October 11 of this year.
For tranche two should we exercise our right, we will make a second $30 million equity investment under the same terms as the first tranche. The second tranche is targeted to close on or before June 10, 2019. At that time I will join the Evofem Board as PDL design me and we plan to appoint our Vice President of Business Development, Dr. Jill Jene as our Board observer.
Alongside our investment two of Evofem's leading additional shareholders Woodford Investment Management and Invesco Asset Management has the right to invest up to $10 million each to purchase Evofem common share. So right to exercise in second tranche is subject to Evofem shareholder approval. We are delighted by the opportunity to invest along Woodford and Invesco. This flexibility structure allows our the advantage of extending our capital as well as building relationship with these significant additional investors that could translate into potential partnerships for future transactions.
Assuming this transaction is fully executed Evofem will raise $80 million which is expected to fund all planned activities in 2019 and into the second quarter of 2020. This includes completion of the NDA resubmission, the commencements of precommercial activities for Amphora performance rebirth control and the completion of the ongoing Phase IIb study for the prevention of chlamydia and gonorrhea in women.
Turning now to our share repurchase program on slide 7. Last September, our Board authorized a $100 million share repurchase program. We have executed on this program by repurchasing 13.1 million shares of PDL common stock during the first quarter of 2019 at an average price of $3.38 per share or $44.4 million. Subsequent to the first quarter we have repurchased 2.8 million shares of common stock at an average price of $3.77 per share for a total of $10.4 million. To-date we have used $80.3 million to repurchase approximately 24.5 million shares at an average price of $3.27 per share. And we have $19.7 million remaining under the $100 million repurchase program.
We previously completed two share repurchase programs between 2017 and mid-2018 for a total of $55 million at an average price of $2.49 per share. We view stock repurchases as an appropriate means of creating shareholder value even with the discrepancies between our share price and our book value. And while our stock price has increased nicely, in fact, by more than 13% in the beginning of 2019, we still have ways to go to close the valuation gap. We are disciplined in the management of our operating expenses as we strive to maximize the use of our financial resources for strategic investments.
We reduced our combined G&A sales and marketing and R&D operating expenses by 22% increasing a 10% reduction in G&A in the first quarter of 2019 compared to the same period last year. Even with the execution of the $100 million stock repurchase program and our investment enables them we have substantial cash on hand to execute our future opportunities. We expect that cash flow generated by our current business will be in excess of operational need, thereby providing additional cash to invest in our future.
Let me now turn to a review of our current investments starting with LENSAR on slide 8, where we continue to see quarterly progress. First quarter review for LENSAR of $6.7 million increased 35% on a 36% gain in procedure volume both compared with the prior year. LENSAR was close to breakeven with a GAAP net loss of $1.2 million and a negative EBITDA of $600000 for the quarter. We continue to be excited about LENSAR's growth potential supporting the refractive cataract surgery market. LENSAR systems are very unique approach to have certain increase in efficiency and patient outcome in managing total active mechanism both pre-existing and surgically induced in their cataract procedures. Branded as the Intel access LENSAR utilizes proprietary measurement in guidance technology for storage and other intraocular lens placement and alignment.
LENSAR is a clear innovation leader in this space. In fact LENSAR is becoming the laser of choice for surgeons in planting intraocular lenses or IOL that require greater accuracy and procedure customization to exceed patients' increasing expectations. We continue to believe in LENSAR's talented team. We are committed to support their R&D efforts to further enhance the technology and to seek additional 510k approvals for expanded indications.
Now turning to slide 9. Noden Pharma is now focused on maximizing the value of Rasilez and Tekturna by increasing profitability and mitigating the impact of generic competition. You may recall that in March, Noden introduced through their partner Prasco Laboratories and authorized generic version of Tekturna in the U.S. This was in response to pending January competition from Anchen Pharmaceuticals. This strategy has proven effective in giving us first-to-market advantage as Anchen has now launched its generic.
We estimate that Prasco has captured approximately 65% of the market for generic Tekturna at this stage. We believe that Prasco is a right partner for authorized generic given its ability to compete effectively. Prasco is the leader in the authorized generic market with 51 brand partners and 89 authorized generic launches across 20 (inaudible) categories with 13 of those launches in the past two years.
As aliskiren is both expensive and difficult to manufacture we do not expect Noden will pay additional third-party generic competitor for Tekturna beyond the generic product launch by Anchen. Given the anticipated generic launch and our focus on profitability, last August, Noden discontinued its U.S. contract efforts which resulted in expense savings of $3.5 million to $4 million per quarter. To mention profitability both generic launch Noden will receive all promotional (inaudible) in the U.S. in the second quarter of this year and it is in the process of restructuring the Noden U.S. team. This will result in further expense savings in the second half of 2019.
As an update on international market I'm pleased to announce the imminent launch of Rasilez in China for Noden's partner Lee's Pharma Holdings. We wish them much success in meeting the needs of Chinese patients with separate from uncontrolled blood pressure. For the quarter Noden was again profitable on a GAAP basis with net income of $5.6 million.
At this point I'll turn the call over to Pete to give additional details on our financial results for the quarter. Pete?
Peter Garcia -- Vice President and Chief Financial Officer
Thank you Dominique. Please turn to our income statement on slide number 10. For the three months ended March 31, 2019 our GAAP net income was $6.7 million or $0.05 per diluted share. Total revenues were $38.9 million for the period and consisted primarily of product revenues of $26.7 million and net royalty payments from acquired royalty rights and a change in the fair value of the royalty rights assets of $12.3 million. Our total revenues of $38.9 million for the first quarter of 2019 compared with $38.5 million for the first quarter of 2018. Product revenues for the first quarter of 2019 increased 14% to $26.7 million from $23.3 million in the prior year period with the increase primarily due to inventory stockings related to the authorized generic product launch of Tekturna in March.
Product revenues consisted of $20 million from Noden product sales which consisted of $12.2 million in U.S. revenue and $7.8 million in the rest of the world and LENSAR revenues for the quarter were $6.7 million. Revenues from the change in fair value of royalty rights were $12.3 million for Q1 of 2019 when compared with $11.1 million for the prior year period. The increase was related to a lower fair value reduction in 2019 when compared to 2018. Royalties from the Queen et al. patents for Tysabri were minimal in the quarter compared with $2.8 million in the first quarter of 2018 and we do not expect to report any meaningful Tysabri royalty revenue in 2019. No interest revenue was recorded for the first quarter of 2019 compared with $749,000 in interest revenue for the first quarter of 2018 with the decrease due to CareView Communications not making interest payments on their loan in the 2019 first quarter.
Turning to operating expenses. For the first quarter of 2019 total operating expenses were $28.4 million, a $5.8 million decline compared with $34.2 million for the prior year period. The decrease in operating expenses was a result of a $4.7 million decrease in amortization expense from the Noden intangible assets as a result of the impairment recorded for those intangible assets in the second quarter of 2018. A $1.2 million reduction or 10% in the G&A expenses primarily due to lower professional fees and a $2.8 million reduction in sales and marketing expenses reflecting the cost savings from the change in marketing strategy for the Noden products. Offsetting these reductions were a $2.2 million increase in Noden products and LENSAR cost of product revenue due to higher sales in both segments. A $600,000 favorable adjustment to the fair value of the contingent consideration recorded in the first quarter of 2018 with no corresponding adjustment in the first quarter of 2019, and higher research and development expenses in our Medical Devices segment.
Turning to our non-GAAP financials results on slide 11. We adjusted our Q1 2019 GAAP net income of $6.7 million for the mark-to-market changes in fair value, amortization of intangible assets, contingent considerations and other non-cash items. This resulted in non-GAAP net income of $11.9 million for the first quarter of 2019 which compares with $14.1 million for the prior year period.
Turning to our balance sheet on slide 12. We had cash and cash equivalents of $366.3 million as of March 31, 2019 compared with $394.6 million as of December 31, 2018. This reduction in cash is a result of $44.4 million used for our stock repurchase program partially offset by positive cash flow from operations and royalties. With regard to future guidance, given the recent launch of the authorized generic of Tekturna and competition from a third-party generic, we're not in a position to give guidance on product sales for 2019. However, based upon current asset values and royalty forecasts we affirm our expectations of between $55 million to $65 million in cash royalties for 2019. We received $12.6 million in cash royalties for the first quarter of 2019 and we are also pleased to report $8.3 million received for Glumetza royalties for the month of April which will be recognized in Q2.
With that financial overview we're ready to open up the call to questions. Operator?
Questions and Answers:
Operator
Thank you. (Operator Instructions)
Dominique Monnet -- President & Chief Executive Officer
While we're waiting for the first question, I'd like to mention our participation at two upcoming investment conferences both in New York. We will be presenting at the UBS Global Healthcare Conference on March 21st and at the Jefferies Global Healthcare Conference on June 4. Webcast of our presentation we will be available on our website. Okay, operator we're ready for the first question.
Operator
And your first question comes from the line of Phil Nadeau of Cowen Inc.
Phil Nadeau -- Cowen -- Analyst
Good afternoon. Thanks for taking my questions. First on the Evofem transaction. In your slides you mentioned that you could take an active role in Evofem. Could you talk a bit more about that? What could you do? Would there be an oversight management role or would it be possible that you participate in the active promotion of the product?
Dominique Monnet -- President & Chief Executive Officer
That's a good question Phil. The active role which we posed on the director position that I will be adding on the Board as well as the observer position that Jill Jene will have. In addition to that really we have been working quite closely already with the Evofem team in looking for opportunities for us to bring value and some of this already as we are going to be for example on the IT side. I think we have a capability with Christian, who is an expert in IT, our General Counsel to be able to assist and to enhance the effort with the Evofem team.
If you look at business development for example, I mean and that is maybe a premature but we are already looking at ways where we could bring to bear our capabilities to complete or complement what Evofem is doing, because clearly as a way to help them, again assuming that we would move forward with a second tranche to help them to accelerate their way to profitability bringing additional products would be very helpful. And this is the thing that we do for a living. And in talking with Saundra and the team I think really this is the place we would value our assistance.
And thirdly, and pretty frankly it's a pleasure to engage with Ross their CCO and his team. They are in an intense period of planning for the launch. So again under the assumption that we would move forward to the second tranche, I personally would look forward to sitting down with him to exchange experience and see how we can just capitalize on each other's experience. Does that answer your question?
Phil Nadeau -- Cowen -- Analyst
Yes. That's very helpful. And then maybe related question is -- long-term how is this investment going to benefit the PDL shareholders? Is it simply an increase in the value of your equity stake or is there a long-term goal directive to some thing consolidate the P&L and basically have the product revenue and net income for the PDL P&L?
Dominique Monnet -- President & Chief Executive Officer
That's a great question Phil. I think as the -- it's a little maybe early for me to expand that clearly when we talk about strategic investment we are looking at being there again under the assumption that we move forward with the second tranche. And that we would probably continue to move forward in helping to fund their launch which could be -- could lead us to significant investment and again increasing our ownership position if we were to assist also in bringing additional products that maybe another way for us and we may not just be the only one. There's a way for us to increasing our ownership position. How far this will take us is a little early to tell. But it's along the way. We continue to feel that this is a therapeutic space which is a great fit for us, that Evofem is truly the company we would like to consolidate opportunities we are exploring around.
We may very well get to a much more integrated strategy and look at options to consolidate otherwise. But again I really do think this is way too early to talk about this. But I think we're focusing on right now is firstly second tranche. Then it is going to be the filing with Evofem. And then it is going to be the launch. And that's going to be over the next 12 months to -- would be very tense on both sides.
Phil Nadeau -- Cowen -- Analyst
Fair enough. That's very helpful. Then just last one financial question. The press release mentioned some Tekturna stocking in the quarter benefiting revenue. Pete do you have any quantification of how much of the Tekturna U.S. revenue was due to stocking in the channel?
Peter Garcia -- Vice President and Chief Financial Officer
So let me give you a few numbers and what we're still kind of figuring this out given it was just launched in March. But effectively of the $20 million revenue about $5.2 million was related to the launch of the authorized generic. About $2.8 million of that went to -- was related to what we believe as Prasco stocking, meaning it's still held with Prasco and the remaining $2.4 million was shipped to wholesalers. So we don't know how much of that $2.4 million actually then went on to patients at this point in time. In addition I should note that of that $5.2 million about $1.8 million was also an adjustment to the gross to net to the negative, so that offset that $5.2 million in the quarterly numbers.
Phil Nadeau -- Cowen -- Analyst
Got it. Okay. Thanks that's very helpful.
Peter Garcia -- Vice President and Chief Financial Officer
Sure.
Operator
Your next question comes from Maxim Jacobs of Edison Group.
Maxim Jacobs -- Edison Group -- Analyst
Hi guys. Thanks for taking my question. So I was just wondering in terms of the profile for future investments will they look kind of like Evofem? So not necessarily an outright buy out but maybe an equity stake?
Dominique Monnet -- President & Chief Executive Officer
Hello Max. I think as we have said we are quite flexible on the structure. I think we clearly strategically we want to make sure that whatever structure we are engaging for the partnership it is as second table. And more importantly it gives us an opportunity to add value to the strategy and the operation. And so what we like in the Evofem and as I mentioned structure is it puts our capital to work directly to fund the operations. And Evofem clearly at this stage in their life cycle has pretty heavy kind of need for tranche. To be able to kind of put that to work to execute on their plans they are supposed to buy out somebody else's share or I know they are owners. I think it feels very efficient let's put it this way.
This being said it's not going to be -- we don't -- we are not going to have a cookie cater for everything. There may be a place for joint venture, there may be a place for licensing or both of them, and if we find a company in the space that we like and there are a few of them that we look at quite in-depth right now, then we might very well continue to look for outwide acquisitions. So it's -- I don't mean to be a wishy-washy thing but the structure is not we're focusing on, what we're focusing on is the asset and the team. We have expertise in capital. We need the other two parts to really make it a winning proposition. The structure is how do we manage to make that partnership work in the best interest of our shareholders.
Maxim Jacobs -- Edison Group -- Analyst
Okay. Great. That's very helpful. Just one more question on this. Just, I mean what's the higher priority? Is it to kind of make sure the Evofem investment is maximized or is it to find other investments?
Dominique Monnet -- President & Chief Executive Officer
Again let me give you an answer which may be a little less than satisfactory but it's both. We are building actually our BD team and across the board because BD as you know is not just a function. It is a cross functional endeavour. And so what we're looking at is being able to do multiple transactions at the same time. There's no question that we spend a lot of efforts right now in Evofem. As you know, as you may recall from previous discussions, we tend to outsource quite a bit of this to extend all experts. We have a very good network of that of clearly in regulatory, in manufacturing and others. This being said it takes a lot of effort to coordinate and to integrate all of it.
But at the same time I can tell you Jill and her team, of course Jill is busy building the team further. And -- but we're also looking at additional transactions. And we certainly are hoping to be able to kind of make additional transaction between now and the end of the year. It's again this is what we do for living.
Maxim Jacobs -- Edison Group -- Analyst
Okay. Great. Yes, that was very helpful. And then just one last question. I thought the (inaudible) cash royalties sell in the quarter sequentially compared to last quarter, is that just a timing thing? Because I see that April looks pretty healthy.
Peter Garcia -- Vice President and Chief Financial Officer
Yes. So thanks Max. This is Pete. So we had in the first quarter we actually -- they had pretty good -- what's our January royalties. So that would be the Valeant/Bausch December sales. They had adjustments related to year-end in chargeback. So we had a relatively large credit that offset the royalties there. As you can see, as we mentioned with April they're kind of going back up. They've been bouncing around anywhere between $3 million and now $8 million a month. So it's a little hard to forecast them.
Maxim Jacobs -- Edison Group -- Analyst
Sounds great. Thanks for taking my questions.
Peter Garcia -- Vice President and Chief Financial Officer
Sure. Thank you.
Dominique Monnet -- President & Chief Executive Officer
Thank you Max.
Operator
(Operator Instructions) And there are no further questions at this time. Please proceed with your presentation or any closing remarks. I'll turn the call back over to Mr. Dominique Monnet.
Dominique Monnet -- President & Chief Executive Officer
Well I just want to thank you all once again for joining us today and we look forward to updating you on our progress at our upcoming investment conferences the one I mentioned and when PDL reports our second quarter 2019 results in early August. In the meantime I wish you all a wonderful day.
Operator
Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
Duration: 35 minutes
Call participants:
Jody Cain -- Investor Relations
Dominique Monnet -- President & Chief Executive Officer
Peter Garcia -- Vice President and Chief Financial Officer
Phil Nadeau -- Cowen -- Analyst
Maxim Jacobs -- Edison Group -- Analyst
