Attached files
| file | filename |
|---|---|
| 8-K - PDL BIOPHARMA, INC. | v195009_8k.htm |
|
SECOND
QUARTER UPDATE
|
August
2010
|
The
second quarter of 2010 was very productive for PDL as we continued to identify
and execute on opportunities to improve returns for our
stockholders. We achieved an increase in royalty revenue
year-over-year, reduced dilution and strengthened our capital
structure. In addition, we realized a gain on our foreign currency
hedging contracts and continued to evaluate new asset purchase opportunities to
build stockholder value today and into the future.
Increased
Royalty Revenue
Total
revenue for the second quarter of 2010 was $120.3 million as compared with
$125.9 million for the second quarter of 2009. Included in the second
quarter 2009 revenue was the second of two $12.5 million settlement payments
from Alexion. Excluding this payment, second quarter 2010
revenue grew by six percent.
Revenue
growth was driven largely by increased first quarter 2010 sales by our licensees
of Avastin®, Herceptin®, Lucentis®, and Tysabri® as well as an increased
quantity of Herceptin and Avastin manufactured and sold outside of the United
States. We receive a flat three percent royalty on Genentech/Roche
products made and sold outside of the U.S., compared to a tiered royalty rate
for U.S.-manufactured Genentech/Roche products and sold anywhere in the
world.
Correspondence
from Genentech
On August
11, 2010, we received a letter from Genentech asserting that Avastin, Herceptin,
Lucentis and Xolair® (the Genentech products) do not infringe supplementary
protection certificates (SPCs) granted by various countries in Europe to PDL.
SPCs extend the duration of patent life and are intended to compensate for some
of the patent term lost while seeking government approval to market a
drug. SPCs are issued on a product-by- product basis and a
country-by-country basis. Our SPCs covering the Genentech products
effectively extend our European patent protection generally until December 2014
(July 2014 for Herceptin). The letter does not raise issues with respect to
whether the Genentech products infringe our U.S. patents to the extent that such
Genentech products are made, used or sold in the U.S., including Genentech
products that are made in the U.S. and sold elsewhere. As a result, PDL
anticipates that Genentech will continue to make royalty payments on such
activities.
It is
important to note that under the 2003 settlement agreement between PDL and
Genentech, Genentech cannot challenge the validity of PDL’s
patents. The settlement agreement requires Genentech to establish
non-infringement of their products under our patents at a considerably higher
standard than that typically applied by the courts.
We
believe that the terms of the SPCs specifically cover the Genentech products and
we intend to vigorously assert our SPC-based patent rights. We plan to
reply to Genentech shortly. Royalties on sales of the Genentech
products that are made and sold outside the United States accounted for
approximately 30 percent of PDL's revenue in the first half of
2010.
Product
Regulatory Updates
T-DM1: In
July 2010, Genentech/Roche submitted an application for approval known as a
Biologics License Application (BLA) to the U.S. Food and Drug Administration
(FDA) for T-DM1, a Herceptin conjugate, for the treatment of people with an
aggressive form of breast cancer known as HER2-positive breast
cancer. The focus of the request for approval for this exciting
therapy is patients who have previously received multiple medicines and
chemotherapies and whose breast cancer is no longer responding to such
treatments. According to Genentech/Roche, T-DM1 could receive regulatory
approval as early as 2011 with peak annual sales of 2 to 5 billion Swiss francs
(approximately US $1.9 to US $4.7 billion).
Lucentis
(ranibizumab): On June 22, 2010, Genentech/Roche announced the
approval of Lucentis for an additional indication, the treatment of patients
with macular edema (swelling in the retina) following retinal vein occlusion.
The FDA approved the new indication after a six-month priority
review. It is estimated that more than one million patients worldwide
are affected by this condition.
Genentech/Novartis
and the National Eye Institute (NEI) of the U.S. National Institutes of Health
each reported positive data from two, large clinical trials investigating the
use of Lucentis as a treatment in patients with a different kind of macular
edema caused by diabetes. While the design of the two trials
differed, both the Genentech/Novartis trial and the government sponsored NEI
trial showed that the addition of Lucentis to the course of treatment resulted
in improved vision for patients when measured at twelve months. In
the Genentech/Novartis trial, patients treated with Lucentis gained
approximately six letters in vision compared to less than one letter
for those treated only with laser therapy.
Mylotarg® (gemtuzumab
ozogamicin): On June 21, 2010,
Pfizer voluntarily withdrew Mylotarg from the market at the recommendation of
the FDA due to safety concerns and a failure to show efficacy. As it
relates to PDL, Mylotarg represents a small percentage of PDL’s revenue, with
royalties of $303,000 for the second quarter. Given this, we do not
believe this development will have a substantial negative effect on our annual
revenue for 2010 and beyond.
Avastin
(bevacizumab): Genentech/Roche’s drug Avastin is
approved for treatment of multiple cancers including advanced colorectal, lung,
kidney and glioblastoma. It is also approved under a special
procedure known as accelerated approval for first line (or first time) treatment
of HER2-negative breast cancer. Avastin received this
accelerated approval based on promising preliminary clinical trial results and a
commitment to conduct further studies. Based on additional
Avastin breast cancer studies that failed to show a meaningful survival benefit,
an FDA advisory committee of experts recently recommended that the accelerated
approval for first line treatment for HER2-negative breast cancer be removed
from the U.S. label for Avastin. If the FDA accepts the
recommendation, we would no longer receive royalties for this indication. Based
on our internal model, we estimate that in 2009 this indication represented less
than 5% of total global Avastin sales. It is important to note that
this recommendation does not impact other approved uses of Avastin on which we
would continue to receive royalties. Also, in late July,
Genentech/Roche announced that they had filed for approval of Avastin for second
line (patients who were treated previously with another drug and are no longer
responding to that drug) treatment of HER2-negative breast cancer.
2
Positive
Clinical Data for PDL Licensed Products: During the
American Society of Clinical Oncology (ASCO) Annual Meeting in June,
Genentech/Roche presented positive data from a Phase 3 clinical trial of Avastin
for use in previously untreated advanced ovarian cancer. This would
be a new and potentially very large indication for the drug. In
addition, positive clinical data for Avastin, Herceptin, and T-DM1 were also
presented at ASCO. Finally, recent positive data presented on
licensed compounds for Alzheimer’s disease bapineuzumab and solanezumab look
promising, with late-stage clinical results for both compounds anticipated in
mid-2012.
Simplifying
our Capital Structure
We have
two convertible notes, one due in 2012 and one due in 2023. At the
beginning of the year, the combined balance outstanding on the convertible notes
was $428 million. The conversion price, or the price at which the
holders may convert the notes into shares of our common stock, is $7.79 and
$5.64, respectively. When we pay dividends we are required to adjust
the conversion price of these notes down by an amount nearly equal to the
dividend paid.
In order
to simplify our capital structure and to reduce fully diluted shares outstanding
as well as the future additional dilution that occurs when we pay dividends to
our stockholders, in the second quarter we repurchased at market prices an
aggregate $84.2 million face value of our convertible notes due in 2023 and, in
early August, we retired an additional $61.6 million of these notes by
exchanging them for 11.1 million shares of our common stock. In
addition, we notified the trustee that we intend to redeem the remaining balance
of $54.3 million of the notes due in 2023 on September 15, 2010. The September
2010 redemption will be for cash or stock at the note holders’
option. As of September 15, 2010, we will have eliminated the notes
due in 2023, reduced our total debt by over $250 million since the beginning of
2010 and decreased the number of diluted shares outstanding by 14.9 million
shares.
Eurodollar
Hedging Contracts
Many of
the licensees who pay PDL royalties sell their products outside the United
States. Thus, the currency exchange rate between the U.S. dollar and
the local currencies can affect the size of our royalties. For
example, if the Euro strengthens in comparison to the U.S. dollar, then the
amount of royalties due to PDL are increased when the payment is converted into
U.S. dollars. Conversely, if the Euro weakens in comparison to the
U.S. dollar, then the amount of our royalties are decreased when the payment is
converted into U.S. dollars. To protect PDL and its stockholders
against some of the volatility in the foreign currency markets, in January of
this year we put in place quarterly Euro hedging contracts for royalties to be
received through the first quarter of 2012. In May, we added an
additional four quarters of hedging contracts for royalties to be received
through the first quarter of 2013. Because the Euro has weakened
compared to the U.S. dollar, these hedges have benefitted PDL. During
the second quarter, this resulted in revenue to PDL of $1.5 million and, for the
contracts which matured June 30, 2010, the gain was $2.9 million which will be
recognized as revenue in the third quarter of this year.
3
Diversification
and New Licensees
In our
efforts to acquire new assets and diversify our business beyond the Queen et al.
patent estate (the Queen patents), we have evaluated more than a dozen
opportunities to purchase new royalty assets over the last six
months. We are looking primarily at biological agents with strong
patent protection. Our primary focus is on commercial-stage products
that are first- or second- in-class or the gold standard for their treatment
group. Also, we continue to seek new licensees who are in late stage
development of humanized monoclonal antibodies for a variety of indications
using the Queen et al. technology for which the products may be launched
commercially before the expiration of the Queen patents.
Dividend
Payment
We
reaffirm our plans to pay a dividend of $0.50 per share on October 1, 2010 to
all stockholders of record as of September 15, 2010.
In
closing, we will continue to evaluate alternatives to increase return for our
stockholders. These alternatives include restructuring or buying back
our convertible notes, buying back our common stock, selling the company, paying
dividends and purchasing royalty generating assets. We look forward
to keeping you apprised of our progress.
Sincerely,
John P.
McLaughlin
President
and Chief Executive Officer
PDL
BioPharma, Inc.
August
2010
4