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PDL Biopharma Inc (PDLI)
Q2Â 2019 Earnings Call
Aug 7, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the PDL BioPharma Second Quarter 2019 Conference Call. [Operator Instructions]
For opening remarks and introductions, I would now like to turn the call over to Jody Cain. Please go ahead, ma'am.
Jody Cain -- Senior Vice President
This is Jody Cain with LHA. Thank you all 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, August 7, 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'll now turn the call over to Dominique Monnet. Dominique?
Dominique Monnet -- President and Chief Executive Officer
Thanks, Jody. Good afternoon, everyone, and thanks for joining us. Please turn to Slide 3 for a brief overview of the quarter. I'm excited by our recent progress at PDL BioPharma as we execute our strategic shift aimed at building a focused portfolio of actively managed operating companies with significant revenue potential.
Indeed, a highlight of the second quarter is the completion of our $60 million investment, where we have taken a significant equity position in Evofem Biosciences. We are committed to working with Evofem's experienced management team to support the successful launch of its flagship product, Amphora, with the ultimate goal of building the company into a leader in women's health.
For the second quarter, we reported a non-cash gain on our investment of approximately $45 million, which is a result of the appreciation of Evofem's stock price from our investment at $4.50 per share to the closing stock price at the end of the quarter and the increased value of the warrants received.
We are pleased with the continued performance of our operating companies, Noden and LENSAR, which are both on target with the execution of our 2019 plans. With regard to our legacy assets, our revenue for the quarter was negatively impacted by a non-cash writedown of the fair market value of the AcelRx royalty right as a result of the slower-than-expected adoption of Zalviso since it was launched in Europe by Grunenthal. This is disappointing and underlines the importance of shifting our business model from passive investments to actively managed assets. We are working to streamline our balance sheet and are considering our options, including exit strategies with regard to our underperforming legacy assets.
We continue to receive significant royalty from the Assertio royalty asset and have ample cash on hand to execute our business strategy. We expect cash flow generated by our current business will be in excess of our operational needs, thereby providing additional cash to invest in our future. We continue to receive numerous opportunities and consider a broad range of potential transactions to build our portfolio.
Turning to Slide 4. Our strategic transaction with Evofem is a strong fit with our mission of creating value for shareholders and patients alike by enabling our partner companies to maximize the potential of novel therapeutics that address underserved needs. We see significant revenue potential for Amphora as it addresses a sizable market opportunity.
In keeping also with our strategy, PDL has assumed an active role as I have been appointed to the Evofem Board of Directors and our Vice President of Business Development, Dr. Jill Jene, is serving as a board observer.
In the near term, we will be working with Evofem's leadership to file for FDA approval and build a strong commercial infrastructure to support the successful launch of Amphora. We are highly aligned with Evofem's leadership and Board in achieving the ultimate goal of building the company into an industry leader in bringing novel solutions to advance the health of women. We view women's health as an area of strategic interest because it presents a significant unmet medical need that has been underserved by large pharmaceutical company.
As a brief overview of the transaction terms, please turn to Slide 5. PDL invested $60 million of the total $80 million received by Evofem under the securities agreement. The agreement with PDL was structured in two tranches with the first closing in April and the second closing in June. At the close of the second tranche, PDL was the second largest investor in Evofem with more than 13.3 million shares of common stock or approximately 29% of the outstanding shares. We also hold more than 3.3 million Evofem common stock warrants exercisable for seven years beginning six months after issuance date, giving us the option to increase our ownership over time.
Turning to Slide 6. I want to share the multiple factors supporting our investment decision in Evofem. Evofem is an innovative, investigational on-demand acid-buffering Multipurpose Vaginal pH Regulator or MVP-R gel with bio-adhesive properties. It is designed to maintain a natural acidic vaginal pH of 3.5% to 4.5%, while inhibiting fertility and preventing survival of spermatozoa, in the prevention of pregnancy. Results from Amphora Phase III studies called AMPOWER were reported by Evofem in December 2018 and showed that Amphora meets the primary endpoint of prevention of pregnancy at a favorable safety profile and was well tolerated.
Earlier this week, Evofem reported additional analysis of an exploratory endpoint for AMPOWER, suggesting that the use of Amphora improves sexual satisfaction and has a positive impact on women's sex lives. AMPOWER is the first clinical study to explore the effect of a contraceptive product candidate on sexual satisfaction.
As a non-hormonal, on-demand contraceptive, Amphora addresses a considerable market opportunity. In the US alone, an estimated 16 million women are sexually active and are not using a contraceptive method, but do not want to become pregnant. This includes women who cannot or will not choose hormonal contraception, which is a primary population that Amphora is expected to serve.
Amphora may also appeal to women who are currently using hormonal contraception but are concerned about the side effects and the long-term impact of the hormones. Of the women surveyed in the AMPOWER study, 88% said that the non-hormonal aspect of Amphora are the most important or extremely important to the decision to use Amphora in the future.
From a payer standpoint, we believe that Amphora will be widely reimbursed as a stand-alone contraception method in the US with low or no copay to the requirements of the Affordable Care Act. Amphora also holds potential for label expansion due to its ability to create an acidic environment that is inhospitable to microbes such as Chlamydia and gonorrhea. Evofem has recently completed enrollment of 860 patients in the landmark AMPOWER Phase II clinical trial with Amphora for the prevention of Chlamydia and with the secondary endpoint of prevention of gonorrhea. And they recently affirmed that it is on track to report top line results in November this year. It is important to note that there are no marketed products indicated for the prevention of Chlamydia, one of the most common sexually transmitted infection in the US.
Importantly, Evofem has a well-defined commercial strategy designed to maximize Amphora dose for prevention of pregnancy. This strategy includes assembling a sales force that covers 96% of the top prescribers of contraceptive products and plan to initiate direct-to-consumer advertising within six to nine months post commercial launch.
Evofem has a strong balance sheet with more than $50 million in cash as of June 30, which is expected to fund planned activities for the second quarter of 2020. This include the NDA resubmission for the prevention of pregnancy, the commencement of pre-commercial activities and the completion of the AMPOWER Phase IIb study for the prevention of Chlamydia. And lastly, Evofem's management team brings relevant and extensive experience and a passion to succeed that is inspiring.
Turning to Slide 7. So how do we create shareholder value with this investment? This year we carry our investment in Evofem at fair value as reflected in the $45.5 million non-cash gain for this quarter. The fair value of our investment is based on the stock price at the close of each quarter. In terms of Evofem's share price evolution, we are excited about the number of near-term catalysts that include: the resubmission of the NDA for Amphora for the prevention of pregnancy, which is expected in the fourth quarter of 2019, the release of Phase IIb top line data from the AMPREVENCE trial on the use of Amphora for the prevention of Chlamydia with the secondary endpoint of prevention of gonorrhea, which is also expected in the fourth quarter of 2019, the PDUFA date for Amphora for the prevention of pregnancy, which is expected in the first half of 2020, and the commercial launch of Amphora in the US, subject to FDA approval, which is expected in the second half of 2020. Over time, we expect the Evofem stock price will appreciate as they execute on their strategy. In turn, we are confident that this will impact positively PDL stock price.
Moving on to Slide 8. We are well positioned to continue executing our PDL business strategy. We continue to have a liquid balance sheet with $285 million in cash, along with royalty rights that are expected to generate $521 million in cash flow through 2026, even with the recent adjustment to the AcelRx royalty forecast. As mentioned, we expect that cash flow generated by our current business will be in excess of our operational needs, thereby providing additional cash to invest in our future.
We are also striving to maximize our financial resources for strategic investment with a strict management of operating expenses. We continue to review numerous opportunities and consider a broad range of investment options in building our portfolio. There are a number of factors that we believe PDL in executing on these opportunities, including our liquid balance sheet which allows us to quickly develop the necessary funds. Our experience and speed will deliver us to be credible in negotiation. And our flexibility in negotiating optimality structures for all parties involved. All these factors played a role in the successful completion of the Evofem securities agreement.
In terms of the types of transactions we are pursuing. We are seeking from asset that can benefit from accessing our capital and expertise with differentiating commercial stage partner, innovative late-stage assets and high-quality collaborative team we can build on. We are considering therapies that target underserved categories and all areas of higher met need with the ability to compete commercially with focused sales team. We are focusing on the US market as our geographic preference, and we are seeking structures that enable attractive return and the opportunity to be actively engaged.
Turning now to our share repurchase program on Slide 9. In July 2019, we completed the $100 million stock repurchase program authorized by our Board last September. Under this program, we repurchased approximately 31 million shares at an average price of $3.22 per share. Of our three completed share repurchase programs since 2017, in total, we used $155 million to repurchase 53.1 million shares at an average price of $2.92 per share.
Let me now review our current portfolio of companies starting with LENSAR on Slide 10. Product revenues from the LENSAR Laser System was $7.4 million, a 26% increase from the second quarter of 2018 and a 10% increase from the first quarter of 2019. These increases are due primarily to revenue outside the US. Procedural volume increased by 28% during the second quarter of 2019 over the prior year period and 7% from the first quarter of 2019.
LENSAR has significant cohort potential in the refractive cataract surgery market, which is the Number 1 surgical procedure globally by volume. LENSAR is a clear innovation leader in cataract surgery. It is becoming the laser of choice for surgeons implanting intraocular lenses that require greater accuracy and pushes your customization. We expect R&D efforts to increase in the coming quarters, as LENSAR continues to build its leadership position by further enhancing its technology and seeking additional 510(k) approval for expanded indications.
Now turning to Slide 11. Noden Pharma is focused on maximizing the value of Rasilez and Tekturna by increasing profitability and mitigating the impact of generic competition. Noden partner Prasco Laboratories began distributing an authorized generic version of Tekturna in the US in March this year. Our first-to-market strategy is proving effective as for the branded Tekturna and Prasco's authorized generic of Tekturna captured a 74% US market share at the end of the second quarter of 2019. Given that aliskiren is both expensive and difficult to manufacture, we do not expect additional third-party generic competition for Tekturna beyond the generic product launch by Anchen.
To maximize profitability, Noden ceased all promotional efforts in the second quarter of this year and has restructured the Noden US team. This will result in further expense savings in the second half of 2019. Noden showed a modest net loss for the second quarter compared with net income of $5.6 million in the first quarter of 2019, which included the initial product shipment to Prasco. For the first six months of 2019, Noden was profitable with net income of $5.3 million.
Before Pete provides additional details on our financial, I'd like to welcome Natasha Hernday to our Board of Directors. Natasha is Senior Vice President of Corporate Development at Seattle Genetics and a member of that firm's Executive Committee. She brings to our Board highly relevant experience in evaluating and successfully executing M&A transactions.
And on behalf of our Board and the entire PDL team, I want to extend my heartfelt thanks to Pete Garcia for his many contributions over the past six years as our CFO. Today is Pete's final quarterly call with PDL, and he will be leaving us next week. We are conducting a search for a professional to step into this essential position on our Senior Leadership Team.
Pete will now review our financial results. Pete?
Peter Garcia -- Chief Financial Officer
Thank you, Dominique. Please turn to our income statement on Slide number 12. For the three months ended June 30, 2019, our GAAP net loss was $4.4 million or $0.04 per share. Total revenues were negative $22.5 million for the period and consisted primarily of product revenues of $17.8 million and net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets of a negative $40.4 million.
Our total revenues of negative $22.5 million for the second quarter of 2019 compared with $46.6 million for the second quarter of 2018. The reason for the negative revenue is a result of a non-cash writedown of the AcelRx royalty assets fair value of approximately $60 million. Without this fair value adjustment, total revenues for the quarter would have been $37.4 million.
Product revenues for the second quarter of 2019 were $17.8 million compared with $31.8 million in the prior year period. Product revenues were $10.4 million from Noden Products sales, which consisted of $2.7 million from the US and $7.7 million in the rest of the world. LENSAR revenues for the quarter were $7.4 million. The decrease in product revenues was due to a decrease in Noden Products sales split equally between the US and the rest of the world. The decline in the Noden sales in the US market was due to the initial inventory stocking of our authorized generic form of Tekturna late in the first quarter of 2019, which limited shipments of the authorized generic in the second quarter as well as the launch of a third-party generic form of aliskiren late in March 2019.
Sales of Rasilez and Rasilez HCT in the rest of the world declined primarily due to the initial inventory stocking in Japan in the second quarter of 2018. Revenues from the change into the fair value of royalty rights were negative $40.4 million for Q2 of 2019 compared with $12.8 million for the prior year period. The decrease was related to a non-cash adjustment to the AcelRx royalty asset and was due to the slower adoption of their product than was previously anticipated. A third-party assessment of the AcelRx royalty asset conducted in the second quarter of 2019 led to a downward revision of the forecasted sales of the product in Europe with a direct impact on both the sales-based royalties and the sales-based milestones expected to be received by PDL through 2033. This was partially offset by higher royalties from the Assertio royalty asset. We received $20.1 million in cash royalties for the second quarter of 2019.
Turning to operating expenses. For the second quarter of 2019, total operating expenses were $27.4 million, a $144.3 million reduction compared with $171.7 million for the prior year period. The decrease in operating expenses was the result of the $152.3 million impairment of the Noden Products intangible assets in the second quarter of 2018 due to the increased probability of a third-party generic version of aliskiren being launched in the US, a $4.8 million decrease in amortization expense for the Noden intangible assets as a result of the impairment recorded for those intangible assets in the second quarter of 2018, a $4 million or 28% reduction in G&A expenses, primarily due to lower professional fees, a $3.3 million or 62% reduction in sales and marketing expenses, reflecting the cost savings from the change in marketing strategy for the Noden Products, and a $2.2 million decrease in Noden Products and LENSAR cost of product revenue. The decrease was partially offset by the $22 million reduction to the contingent liability in the second quarter of 2018 for future Noden product milestones that were less likely to be made with the increased probability of a third-party generic version of aliskiren being launched in the US.
Moving on to our year-to-date results on the same slide. For the six months ended June 30, 2019, our GAAP net income was $2.3 million or $0.02 per share. Total revenues were $16.4 million, which compares with $85.1 million. The decrease was primarily due to the lower royalty asset revenues and lower product revenues from our pharmaceutical segment. Product revenues were $44.5 million compared with $55.1 million for the prior year period. Product revenues consisted -- in 2019 consisted of $30.4 million from the sale of Noden Products and $14.1 million from the product sales of the LENSAR Laser System.
Net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets was a negative $28.1 million. This compares with $23.9 million for the year-ago period. The decrease was related to the AcelRx royalty asset fair value decrease, as discussed previously. Year-to-date, in 2019, PDL has received $32.7 million in cash royalty. Interest revenues decreased by $1.5 million from the prior year period due to modifications to our agreement with CareView Communications, which suspended interest payments.
Operating expenses for the six months ended June 30, 2019, were $55.8 million compared with $205.9 million for the prior year period. The decrease primarily resulted from the impairment of the Noden Products intangible asset of $152.3 million in Q2 2018, a $9.5 million decline in amortization expense for the Noden intangible asset, a $6.1 million or 56% decline in sales and marketing expenses, reflecting the cost savings from the change in our marketing strategy for Noden Products, and a $5.2 million or 20% decline in general and administrative expenses, primarily due to lower professional fees. The decrease was partially offset by the $22.7 million reduction to the contingent liability in the first half of 2018 for future Noden product milestone payments.
Turning to our non-GAAP financials on Slide 13. We adjusted our Q2 2019 GAAP net loss of $4.4 million for the mark-to-market changes in fair value, amortization of intangible assets and other non-cash items. This resulted in non-cash net income of $12.7 million for the second quarter of 2019, which compares with $15.5 million for the prior year period. Year-to-date, we adjusted our non-GAAP net income of $2.3 million for the first six months of 2019 with the same adjustments as the second quarter, which resulted in non-GAAP net income of $24.5 million, which results -- which compares with non-GAAP net income of $31.1 million for the prior year period.
Turning to our balance sheet on Slide 14. We had cash and cash equivalents of approximately $285 million as of June 30, 2019, compared with $395 million as of December 31, 2018. This reduction in cash is a result of $70.4 million used for our stock repurchase program and $60.4 million used for our investment in Evofem, partially offset by cash flow from royalties.
Turning to Slide 15, with regard to future guidance. With the launch of the authorized generic of Tekturna and known competition from a third-party generic, we're now in a position to give guidance on Noden product revenue for 2019. For the full-year 2019, we expect the Noden product revenue to be $50 million to $55 million. And for LENSAR, we expect full-year 2019 product revenue to be $27 million to $29 million.
As far as royalty rights, fair value with the potential changes in long-term forecasts, we cannot give proper guidance for royalty revenue, changes in fair value. However, given the large Grunenthal royalty of $11.3 million received in August, we are increasing our cash royalties expectations for 2019 to between $60 million to $65 million. As far as our investment in Evofem goes, the accounting impact will be driven by Evofem's stock price and volatility as future mark-to-market adjustments will be based upon the quarter-end stock price and warrant valuation. Changes in fair value will be booked under non-operating income or loss as a change in fair value to an equity affiliate and the total value of the investment will be reflected on our balance sheet as an investment in an equity affiliate.
Before I turn the call back over to the operator, I'd like to express my gratitude to the PDL team and to the Board for their support these past six years. To my colleagues and to our investors, the assistance you've provided me and the insight you shared have been invaluable to me. As an investor, I look forward to following PDL's progress in securing strategic transactions with therapeutics that have strong revenue potential.
With that, we're ready to open the call up for questions.
Questions and Answers:
Operator
[Operator Instructions]
Dominique Monnet -- President and Chief Executive Officer
And while we are waiting for our first question, I'd like to mention our participation in the Cantor Fitzgerald Global Healthcare Conference being held October 2 through 4 in New York. A webcast of our presentation will be available on our website.
Operator, we are ready for the first question.
Operator
Our first question will come from Max Jacobs, Edison Group.
Max Jacobs -- Edison Group -- Analyst
Hi guys. Thanks for taking my question.
Peter Garcia -- Chief Financial Officer
Hello, Max.
Max Jacobs -- Edison Group -- Analyst
And Peter, we'll miss you.
Peter Garcia -- Chief Financial Officer
Well, thank you, Max.
Dominique Monnet -- President and Chief Executive Officer
You're right, Max. We will miss him.
Max Jacobs -- Edison Group -- Analyst
Yes. So first, I just wanted to ask about LENSAR. Is there any additional color you can give us on just what's driving the nice growth?
Dominique Monnet -- President and Chief Executive Officer
Do you want to take it, Pete?
Peter Garcia -- Chief Financial Officer
Yes. So I mean, they are making a lot of good progress with systems implementation and new systems. Obviously, there were some adjustments related to that with the gross margin, that's why you see the gross margin going down. But that's because they had new systems out there. And then obviously, with new systems come more procedures, and that would lead to additional nice growth. And obviously, we also talked about previously that they were somewhat limited in their funding and financing. And once PDL stepped in, I think that kind of changed the way that the ophthalmologists started looking at their business.
Dominique Monnet -- President and Chief Executive Officer
Yes, just to build on that, I think it's fair to say that the innovative nature of the LENSAR Laser System gets increasingly recognized and the market for the systems, particularly outside of the US but also inside the US, is getting increasing traction. Now I would size the US, particularly in Asia, there has been some concern about the enrollment and the tariffs, in particular from China, but at this point, the company continued to make very good progress. And it is also an area, as you have seen, where we make investments in R&D because we really believe that the LENSAR technology is really differentiated in the marketplace.
Max Jacobs -- Edison Group -- Analyst
Great. That's very helpful. And then just, since we're on the subject of China, I was just wondering on the Tekturna launch in China. Just what's the size of that?
Dominique Monnet -- President and Chief Executive Officer
Yes, Tekturna is launched in China. Per the agreement, we are not, I mean the royalty payments are not kicking off until they have an opportunity. I mean, they are very small for a period of time. We have some fixed payments, which are being paid on an annual basis. But it has taken place in the second quarter as announced. It is now what I would call essentially still in the prelaunched phase, where they are just working along on the specialist and spreading the adoption. I think we'll, hopefully, have a much more granular kind of date for you in the second -- in the third quarter.
Max Jacobs -- Edison Group -- Analyst
Okay, great. And then just one last question. I was just wondering if you'd be able to share what you expect Zalviso peak sales to be based on your new forecast?
Peter Garcia -- Chief Financial Officer
So we don't release that information. Sorry.
Max Jacobs -- Edison Group -- Analyst
Yes, it was worth a try.
Peter Garcia -- Chief Financial Officer
You may check with AcelRx. And actually, the actual royalties come from Grunenthal, as you're aware, and they're a private company. So we had enough time trying to get enough information over the last few months here.
Dominique Monnet -- President and Chief Executive Officer
But as you have seen in the press release, I think we actually get the -- some of the key findings from that external analysis, and I think it may help you figuring out the challenges that they are facing.
Max Jacobs -- Edison Group -- Analyst
Yes, definitely. Well, thanks for taking my question.
Dominique Monnet -- President and Chief Executive Officer
You're welcome. Thank you, Max.
Peter Garcia -- Chief Financial Officer
Thank you, Max.
Operator
[Operator Instructions] And it appears we have no further questions. I'd like to turn the call back over to Dominique for closing comments.
Dominique Monnet -- President and Chief Executive Officer
Well, thank you all again, once again for joining us today. We are excited about our transformation at PDL as we build a focused portfolio of quality companies with promising products while streamlining, at the same time, our balance sheet. We look forward to updating you on our progress when PDL reports third quarter 2019 results in early November. In the meantime, we wish you a wonderful end of your day.
Operator
[Operator Closing Remarks]
Duration: 34 minutes
Call participants:
Jody Cain -- Senior Vice President
Dominique Monnet -- President and Chief Executive Officer
Peter Garcia -- Chief Financial Officer
Max Jacobs -- Edison Group -- Analyst
