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PDL Biopharma Inc (PDLI)
Q3Â 2019 Earnings Call
Nov 6, 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 Third 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 of LA
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 Ed Imbrogno, Vice President, Finance and Chief Accounting Officer. Nick Curtis, CEO of LENSAR, one of PDL's operating subsidiaries will join us for the question-and-answer session. Please turn to Slide two 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, November 6, 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 like to turn the call over to Dominique Monnet. Dominique?
Dominique Monnet -- President and Chief Executive Officer
Thanks, Jody. Good afternoon everyone and thank you for joining us. Turning to Slide 3. I am pleased to report on our progress of the past few months including third quarter revenues exceeding $44 million. Our August performance was driven by sales growth from the LENSAR and a favorable contribution from our royalty assets, both of which are tracking ahead of our 2019 guidance. We continued our effort to reduce operating expenses with G&A down 16% year-to-date. At the same time, we made further investment in LENSAR R&D We continued to have a balanced approach to our capital allocation. We completed our third share repurchase program during the quarter. Since March 2017, we have repurchased $53.1 million shares of PDL, almost 32% of our common stock for total investment of $155 million. In early 2019, we began implementing our new strategy aimed at growing shareholder value by building a focused synergistic portfolio of biopharma companies with significant revenue potential.
We believe we are in a strong position to execute the strategy successfully and to drive the growth of our share price by delivering sustained profitable revenue growth. However, as we evaluate further transaction, we decided in September to seek an independent assessment of our strategy in capital allocation by engaging an independent financial advisor. This evaluation is ongoing and we'll ultimately represent it to our Board of Directors. We service as a pretend course of action taking into consideration the opportunities and challenges in the current environment for the type of innovative biopharma companies we seek to acquire, nurture and grow. We also continue to listen to suggestion from our shareholders, with whom we seek to maintain and open and constructive dialogue. We forgot to our Q1 portfolio of assets. We are encouraged by our results year-to-date. We're particularly excited about the prospects for continued growth for LENSAR.
Turning to Slide 4. LENSAR net sales for the quarter reach a record $8.1 million. This is a 22% increase from the third quarter of 2018, and a 9% increase from the second quarter of 2019. Year-to-date net sales exceeded $22 million, up 27% over the prior-year period, and putting us on track to exceed our full-year guidance for LENSAR revenues of $27 million to $29 million. We are pleased that our investment in R&D over the past few quarters is paying off. With LENSAR effectively building upon its position as an innovator for the treatment of cataracts that require greater accuracy and procedure customization. LENSAR has established itself as the innovation leading femto laser company. Further LENSAR continued to strengthen its patent extend to its own patent filings as well as the important recent acquisition of key intellectual property making it a premier technology company in the GEN2 space.
LENSAR's technology advantage has been increasingly recognized by ophthalmic surgeons with sustained year-over-year procedure volume growth in the product was launched in 2012. In fact procedure volume for the first nine months of 2019 is up 30%. We expect to exit 2019 with a number of procedures worldwide exceeding 100,000 as LENSAR has quickly captured the 13% share of the global femtosecond laser-assisted cataract surgery market based both on the number of procedures performed and on revenues.
Turning to Slide 5. LENSAR is very well positioned for sustained growth. LENSAR feature is a best-in-class technology with its Streamline IV, which enables the optimal treatment of tissue-specific cataract and management of astigmatism. Between 70% and 90% of patients have treatable visually significant astigmatism prior to cataract surgery, but this astigmatism remains largely uncorrected. These represent a significant unmet need in cataract surgery, a need that is uniquely addressed by LENSAR proprietary IntelliAxis Refractive Capsulorhexis.
This technology creates a pair of small tabs on the capsular rim that actually surgeons in accurately aligning the toric IOL marks along the axis of astigmatism enabling its correction. Over the past few months, a number of studies have demonstrated a significant improvement in patient outcome with the LENSAR system. It is worth noting that LENSAR-installed systems perform 79% more procedures than the worldwide average per femtosecond laser. The advanced astigmatism management features improved precision and reproducibility while driving increased utilization with outcome based surgery.
I would like to thank Nick Curtis, LENSAR's CEO for making himself available to take question at the end of our prepared remarks.
On Slide 6, LENSAR is poised to continue to strengthen its position as an innovation leader with the development of its second generation system, which we simply refer to as GEN2. We expect GEN2 to be the first integrated workstation that combines the state-of-the-art benefits of the LENSAR Laser System and ultrasound phacoemulsification system, enabling surgeon to switch seamlessly between the two integrated devices without patient or procedure flow disruption.
In short, GEN2 will be the first all-in-one femto-phaco device. It targets a growing trend for in-office cataract surgery and the growth of the premium cataract surgery market. Assuming a modest 2.5% share of the phaco market, we estimate by GEN2 has the potential to generate additional revenues of that to $1 billion over 10 years. LENSAR is targeting a 510(k) submission for GEN2 at the end of 2021 with a commercial launch in 2022.
Moving on to a discussion of Evofem Biosciences on Slide 7. As of June, we have the 29% equity stake in Evofem following the closing of the second tranche of a $60 million strategic investment. By the end of the third quarters, a value of our investment shows a net investment gain of $18 million. However, the Evofem share price has suffered since last June for the significant overhang created by the suspension, unexpected liquidation of the Woodford Equity Investment funds, which were 9.1 million shares of Evofem. We are confident that once this overhang is lifted, Evofem's share price will rebound. Unfortunately, the drop in Evofem share price in the third quarter resulted in a $27 million unrealized investment loss during that period, which contrast with the $45 million unrealized investment gain. We're reporting on our Evofem Holding in the second quarter.
From an operational viewpoint, we are very encouraged with the progress made by the Evofem team. They are on track to complete a resubmission of the Amphora NDA for the prevention of pregnancy by the end of this year. Based on our diligence, we share Evofem's confidence that Amphora will gain FDA approval after six months' review. Evofem would then plan to launch them for our shortly thereafter as a first-in-class Multipurpose Vaginal pH Regulator for hormone-free birth control that is managed by the woman.
You may see on these slides, there are three primary factors that give us confident in Evofem's regulatory report to getting FDA approval for Amphora for the prevention of pregnancy. First, the Phase 3 AMPOWER trial was designed to exceed the required numbers of women and cycle agreed to with the FDA. The trial achieved strong clinical results by clearly made studies pre-specified primary endpoint and Amphora was well tolerated with its favorable safety profile.
Second, Evofem is receiving expert regulatory direction from former FDA Director, Dr. Lisa Rarick, who has years of experience in the review and approval of our productive products. Dr. Rarick brings a highly variable perspective to the FDA's regulatory pathway for contraceptives in support of Amphora's NDA filing. And third, as evidenced by discussion at a recent FDA Advisory Board Meeting, advisors repeatedly highlighted the need for additional contraceptive options.
Turning to Slide 8. As I mentioned, Evofem has a number of key near-term catalysts with the potential to drive its valuation. Among these are a readout of top-line data from the Phase 2b AMPREVENCE trial, which is expected in three months. The AMPREVENCE trial is evaluating Amphora for the prevention of chlamydia with the secondary endpoint of prevention of gonorrhea. This clinical program provides a potential opportunity to expand Amphora's label to include STI prevention. We've approved Amphora would meet an important unmet need for the prevention of chlamydia. As discussed, Evofem remains on track to resubmit its NDA for the prevention of pregnancy by the end of this year with FDA approval anticipated in 2020 and the U.S. commercial launch soon thereafter.
Turning now to Noden Pharma. We have stabilized our U.S. market share with branded Tekturna and our authorized generic of Tekturna target holding and approximate 73% share at the end of the third quarter relatively unchanged from the end of June 2019. We've reduced our cost structure by eliminating our domestic sales organization following the generic launch. Without a short-term impact of a provision in our supply agreement, Noden would have been profitable for the quarter. Year-to-date, Noden's operations have been profitable generating net income of $3.2 million.
Turning to Slide 9. PDL continues to have a strong and liquid balance sheet with $294 million in cash, along with royalty rights that are valued at $314 million, and I expected to generate $465 million in cash flow for 2026.
As mentioned, we completed our $100 million share repurchase program. On a year-to-date basis, this buyback program has been our largest single investment and represents our continued attention to capital allocation and dedication to serving our shareholders. Last month, we took advantage of the strengths of the capital markets to extend the maturity date of $86 million of our comfortable day to December 2024. And as a final topic, we were very pleased with the summary judgment announced in September by the Supreme Court of New York in our litigation related to loan defaults by Wellstat Diagnostics. These loans were made by PDL pursuant to an agreement in August 2013. We expect to seek recovery for the full amount due under the terms of the loan, including the principle accumulated interest, further advances and fees.
With that, I'd like to turn the call over to Ed Imbrogno to discuss our financial results. Ed?
Ed Imbrogno -- Vice President, Finance and Chief Accounting Officer
Thank you, Dominique. Please turn to our income statement on Slide 10. Total revenues for the third quarter of 2019 were $44.2 million and included $20.3 million in product revenue and $23.9 million in revenue from royalty rights, change in fair value. Product revenue from LENSAR laser system increased 22% to $8.1 million from the prior-year period, it was up 9% from the second quarter of 2019. Product revenue from Noden Pharma was $12.2 million compared with $17.8 million in the prior-year period, with the revenue split equally between the U.S. and Rest of the World at $6.1 million. U.S. market share for branded Tekturna in our authorized generic of Tekturna was 73%, relatively unchanged from the second quarter of 2019. Net royalty payments from acquired royalty rights and a change in fair value of the royalty rights assets was $23.9 million compared with $42.2 million in the prior-year period. The decrease was primarily related to increase in fair value in the prior-year period that resulted from our acquisition of additional Glumetza royalty rights from Assertio. We received $25.6 million in net cash royalties from all of our royalty rights in the third quarter of 2019. This is up from $19.1 million from the year-ago quarter.
Turning to operating expenses. For the third quarter of 2019, total operating expenses were $34.7 million compared with $31.2 million for the prior-year period. The increase in operating expenses was a result of higher R&D expenses, which represented an investment in LENSAR product development in patent licensing, and an increase in cost of product revenue related to a termination provision in Noden supply agreement amended in June 2019, involving end of contract fees, most of which were incurred in the third quarter of 2019. This provision will have a modest impact in the fourth quarter. The increase was partially offset by lower G&A expenses, primarily due to lower professional fees and a decrease in sales and marketing expenses reflecting the cost savings from the change in the marketing strategy for the Noden products. for the three months ended September 30, 2019, net loss was $17.8 million or $0.16 per share compared with net income of $25.6 million or $0.18 per share for the prior-year period.
Moving onto our year-to-date results on the same slide. Total revenues for the first nine months of 2019 were $60.6 million and included $64.9 million in product revenue and a negative $4.3 million in revenue from royalty rights, change in fair value. Product revenue from LENSAR was $22.2 million, up 27% from the prior-year period. LENSAR procedure volume for the first nine months of 2019 increased 28% from the prior-year period. Product revenue from Noden Pharma was $42.6 million compared with $62 million for the prior-year period. Sales for the first nine months of 2019 were comprised of $21 million in the U.S. and $21.6 million in the Rest of the World, compared with $30.6 million and $31.4 million respectively in the prior-year period.
The decline in sales of branded Tekturna in the U.S. is primarily due to the launch of an authorized generic of Tekturna in the U.S. and the launch of a third-party generic of aliskiren late in the first quarter of 2019. The decline in sales in the rest of the world is due to lower sales volume of Rasilez in certain territories, in part reflecting additional measures to maximize product profitability. Revenue from royalty rights change in fair value was negative $4.3 million for the first nine months of 2019, compared with $66.1 million for the prior-year period. The decrease is primarily related to a non-cash adjustment to the AcelRx royalty asset fair value of $60 million in the second quarter of 2019. We received $58.3 million in net cash royalties from our royalty rights in the first nine months of 2019.
The interest revenue decreased by $2.3 million from the prior-year period due to modifications in our -- to our agreement with CareView Communications, which deferred interest payments for the first nine months of 2019. Royalties from PDLs licensees to the Queen et al. patents were minimal for the first nine months of 2019, compared with $4.5 million for the prior-year period, reflecting the run out of the royalties on the sales of Tysabri. operating expenses for the nine months ended September 30, 2019, decreased by 62% to $90.6 million compared with $237.1 million for the prior-year period. This decrease primarily resulted from the impairment of the Noden Products intangible tangible asset of $152.3 million in Q2 2018. the decline in G&A primarily due to lower professional and asset management fees, and lower sales and marketing expenses reflecting the cost savings from the change in our marketing strategy for noden Products. These decreases were partially offset by an increase in R&D, associated with our investment in product development and patent licensing for LENSAR.
For the nine months ended September 30, 2019, net loss was $15.5 million or $0.13 per share compared with a net loss of $85.1 million or $0.58 a share for the prior-year period. Turning to our non-GAAP financial results on Slide 11. We adjusted our Q3 2019 GAAP net loss of $17.8 million for the mark-to-market changes in fair value, amortization of intangible assets and other non-cash items. this resulted in non-GAAP net income of $10.4 million for the third quarter of 2019, which compares with $13.1 million for the prior-year period. Year-to-date, we adjusted our GAAP net loss of $15.5 million for the first nine months of 2019 with the same adjustments as the third quarter, which resulted in non-GAAP net income of $34.9 million. This compares with non-GAAP net income of $44.2 million for the prior-year period.
Turning to our balance sheet on Slide 12. We had cash and cash equivalents of $294 million as of September 30, 2019, compared with $395 million as of December 31, 2018. the reduction of cash as a result of $75.9 million used for our stock repurchase program, $60 million used for our investment in Evofem. costs incurred in exchange of convertible debt of $11.1 million and net cash used in our operations of $13.3 million partially offset by the proceeds from royalty rights up $58.1 million and cash proceeds from the sale of intangible assets of $5 million. As far as our investment in Evofem goes, the accounting impact is driven by Evofem stock price and volatility as mark-to-market adjustments are based upon the quarter-end stock price and warrant valuation. Changes in fair value are 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. Turning to Slide 13. We are on track to exceed our prior overall 2019 guidance to reflect our strong performance. We are affirming our expectation for Noden Product revenue to be in a range of $50 million to $55 million. for LENSAR, we are revising our expectations upward. We now expect 2019 LENSAR sales to exceed $29 million, up from our prior guidance of $27 million to $29 million. and likewise, we now expect cash flows from our royalty assets to exceed our prior guidance of $60 million to $65 million.
With that, we're ready to open the call for questions. Operator?
Questions and Answers:
Operator
[Operator Instructions]
Dominique Monnet -- President and Chief Executive Officer
While we are waiting for our first question I'd like to mention our participation in 2 upcoming investment conferences. We will be at the Jefferies 2019 London Healthcare Conference being held November 20 and 21 and we will also be at the Piper Jaffray Healthcare Conference being held December 3rd through the 5th in New York. We will also be meeting with investors during the annual JPMorgan Healthcare Conference in San Francisco in January. If you're interested in meeting please contact our Investor Relations firm LHA at 310-691-7100. Okay operator we are ready for the first question.
Operator
Your first question comes from the line of Kenneth Atkins with Cowen and Company.
Kenneth Atkins -- Cowen and Company -- Analyst
Hi, thanks for taking my questions. You mentioned that you have ongoing efforts to reduce opex. Could you provide us with some more detail on what exactly that entails and highlight any recent success you've had there?
Dominique Monnet -- President and Chief Executive Officer
Well, I think as you know, a significant part of our opex actually is driven to our diligence efforts. So what we are doing here is trying to focus increasingly, I think we have built a strong competency in the targeted areas, which we are most interested in, including in women's health. And I think that background frankly is helping us to drive efficiencies moving forward. The other part -- significant part of our opex was also in legal fees and we had litigation as you know, in particular with Wellstat. this is definitely not fully behind us, but we are the point we believe we have -- we are in a position to be extracting some savings from these two areas.
Kenneth Atkins -- Cowen and Company -- Analyst
Great. Thanks. That makes sense. Also, could you just outline for us what your overall strategy is for the Evofem investment? Would you consider an outright acquisition at some point, or how would you decide when would be a good time to exit that investment if that were an option available to you? Just any detail you could provide there would be helpful.
Dominique Monnet -- President and Chief Executive Officer
Well, it is as you can imagine, I cannot discuss in details what I'll -- strategy is going to be in our options, it depends in part on the needs of Evofem. And it is we have very active discussions with both the leadership and the board of Evofem on this. and we will see you know, how these things move forward. But what I want to say is our investment in Evofem was not speculative. It was strategic. And so from that perspective, we are looking really at partnering, where they will make sure that they are successful in launching Amphora, because we believe in the potential of that asset.
Kenneth Atkins -- Cowen and Company -- Analyst
Okay. Thanks.
Operator
Your next question comes from the line of Max Jacobs with Edison Group.
Max Jacobs -- Edison Group -- Analyst
Hi guys. Thanks for taking my questions. So just first, I'd want to ask about the GEN2 system from LENSAR. I was just wondering what's the current stage of development for that product?
Dominique Monnet -- President and Chief Executive Officer
It is -- actually one on I -- since we have the benefit and privileged to have Nick Curtis on the phone. Nick, do you want to give as a brief high level of a view of the development of the GEN2?
Nicholas T. Curtis -- Chief Executive Officer President and Director
Sure. So, we are presently working with an industrial design on what the product is actually going to -- going to look like here. We've been working with the breadboards. So, we've been testing both the optical system as well as the laser that we're going to be using, understanding that since we already have a GEN1 product that has a lot of advancement in technology and particularly in the way that the hardware and the software interact and many upgrades through software. The actual development risk on this device is really not near as great as one might think, because we already have an established technology. So, we have breadboards, we're working on the optical system. We're doing laser testing and we would expect to have a prototype of the device, the way the commercial device is going to look like some time toward the latter part of the second quarter next year.
Dominique Monnet -- President and Chief Executive Officer
Thanks, Nick. And let me add max that Nick and his team have been working on that. That's an exciting development for a number of reasons. We briefly touched on. We decided to start having a discussion on those developments, because we believe it's a -- it's another expression of LENSAR's kind of continued innovation in the field and -- but we waited until we had an opportunity to achieve a significant IP position in that field for the combination of the phaco and femto systems. And we think we are in that position now, hence our desire to start, speak talking about what Nick and his team are doing, which frankly, I find to be extremely exciting and again, is essentially writing a number of development in the marketplace, which would make it very attractive in terms of market potential.
Max Jacobs -- Edison Group -- Analyst
Great. That's helpful. And so I'm assuming since this is a kind of like almost like a natural evolution from GEN1 that this will be a -- just a regular 510(k) submission, not a de novo.
Dominique Monnet -- President and Chief Executive Officer
That is correct.
Max Jacobs -- Edison Group -- Analyst
And what sorts of trials, will you have to run any trials? Like what kind of data are you going to have to provide the FDA?
Nicholas T. Curtis -- Chief Executive Officer President and Director
So that's a really good question. We always run trials. most of FDA data related to product approvals with these type of devices is related to taking a device that's already approved that you compare to. So, in this case, we're not developing a brand-new phacoemulsification system that we're going to be integrating. So, we'll be using a comparative that is like phaco devices that are already approved, number one.
And number two on the laser side, the predicate device would be our own LENSAR laser system to begin with. So, primarily for FDA approval, you're going to provide a safety data, but not really efficacy data as to the performance of the lasers itself. We will run some clinical studies as it relates to the efficacy of the laser, so that we do have some data available, should the FDA require it.
Max Jacobs -- Edison Group -- Analyst
Great. That's very helpful. And then just wondering about in terms of the strategic review for the company just, I know you probably can't tell me any exact timeline, but just around about what -- when do you think that might be completed or at least when do you think you'll be able to communicate something to the market?
Dominique Monnet -- President and Chief Executive Officer
We haven't committed to a specific timeframe and for good reason, because it's an important assessment. And so we want to make sure that our partners in opportunity or at least how advisors in opportunity to contact it. But we are moving expeditiously and we generally are very motivated of having the discussions. We think it's an important one. And for reasons that I've mentioned, clearly, our strategy involves supporting, nurturing, helping to grow organization that I'd already significantly derisk, but still by the sheer fact that they are in the biopharma space are represent to certain investment risk. So, we wanted to make sure that we had the independent viewpoint on this. So, I'm not going to be committing to a timeline this -- that we will keep you abreast of what's going on.
Max Jacobs -- Edison Group -- Analyst
Okay, great. Well, that's all from me. Thanks for answering my questions.
Dominique Monnet -- President and Chief Executive Officer
Thank you. Thank you, max.
Operator
Thank you. Ladies and gentlemen, I would now like to turn the call back over to Dominique Monnet.
Dominique Monnet -- President and Chief Executive Officer
Thank you very much. Thank you all very much again, for joining us today. We are excited about our transformation at PDL as we build a focused portfolio of quality companies with promising product. As we have mentioned, we are moving in a very disciplined and thoughtful way in doing this. We look forward to updating you on our progress and we'll report fourth quarter and full-year 2019 results in March; 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 of LA
Dominique Monnet -- President and Chief Executive Officer
Ed Imbrogno -- Vice President, Finance and Chief Accounting Officer
Nicholas T. Curtis -- Chief Executive Officer President and Director
Kenneth Atkins -- Cowen and Company -- Analyst
Max Jacobs -- Edison Group -- Analyst
