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PDL BioPharma Inc. (PDLI - Analyst Report) posted first quarter earnings of 25 cents per share, above the year-ago figure of 15 cents and also a penny above the Zacks Consensus Estimate of 24 cents. Lower general and administrative expenses boosted earnings in the quarter.

Quarterly Details

PDL currently derives a significant portion of its revenue from licenses granted to other companies under the Queen et al patents, covering the humanization of antibodies. The patents are set to expire in 2014.

First quarter revenue of $83.3 million topped the year-ago revenue of $62.1 million, representing an increase of 34%. The revenue, however, includes a lump sum payment of $10 million from UCB Pharma S.A. (UCBJF) for settlement of all legal disputes between the companies in January 2011.

Hence, the revenue incorporates royalty revenue of as much as $73 million, an estimated 18% growth over the prior-year period. The revenue generated in the reported quarter was minimally ahead of the Zacks Consensus Estimate of $83 million.

The top-line increase resulted from higher sales of Roche’s (RHHBY - Analyst Report) Herceptin and Lucentis and Biogen/Elan’s (BIIB - Analyst Report)/ Tysabri, in the fourth quarter of 2010, on which PDL received royalties in the first quarter.

Also contributing to increased royalty revenue was an increase in the proportion of Roche’s Avastin that were both manufactured and sold outside US for which PDL receives a higher 3% flat royalty.

General and administrative (G&A) expenses were $5.8 million in the reported quarter, down 38% from $9.4 million in the prior-year quarter. In early 2011, PDL resolved its legal disputes with Novartis (NVS - Analyst Report), UCB Pharma and MedImmune [a subsidiary of AstraZeneca (AZN - Analyst Report) and all European opposition to ‘216B Patent (key European patent) was terminated.

The settlement of all legal wrangles led to lower legal fees in the reported quarter, which in turn reduced the G&A expenses. These legal costs are expected to go down further in the upcoming quarters.

Management is seeking additional revenue streams or assets to increase shareholder value as expiration of Queen et al. patent portfolio approaches in 2014. It is particularly looking for biological agents with strong patent protection.

Our Recommendation

We currently have a Neutral recommendation on PDL, which is supported by a Zacks #3 Rank, translating into a short-term Hold rating. Overall, we are encouraged by PDL’s recent progress in resolving multiple disagreements with Novartis, UCB and the decision of the European Patent Office to uphold the validity of the European patents.

The litigation with Roche, however, continues. The resolution of the Roche disagreement is not expected in the near term.

A trial date is not likely before late 2011 or early 2012. We therefore prefer to remain on the sidelines until a decision is reached in this case. The near-term patent expiration of the Queens patents also concerns us.

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