PDL BioPharma Inc. ( PDLI - Analyst Report ) posted second quarter earnings of 39 cents per share, a penny above the year-ago figure of 38 cents due to lower general and administrative expenses in the quarter. Earnings were however a penny short of the Zacks Consensus Estimate of 40 cents due to revenue not being able to meet the consensus estimate.

PDL BioPharma 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.

At present PDL BioPharma receives royalty on worldwide net sales of Roche Holdings Ltd.'s ( RHHBY ) Avastin and Herceptin; Roche and Novartis AG’s ( NVS - Snapshot Report ) Lucentis, and Elan Corporation ( ELN - Snapshot Report ) and Biogen Idec’s ( BIIB - Analyst Report ) Tysabri. While the royalty payments are tiered in the US, PDL BioPharma receives a flat 3% royalty if a product is both manufactured and sold outside the US. However, Tysabri royalties are calculated at a flat rate as a percent of sales, irrespective of the manufacturing or sales location.

PDL BioPharma generated second-quarter 2011 revenue of $122.1 million, representing an increase of 1.5% over the year-ago revenue of $120.3 million. Revenue however fell short of the Zacks Consensus Estimate of $125 million.

Increased royalties in the quarter from higher sales of Herceptin, Lucentis and Tysabri were offset by reduced royalty from Avastin sales. In the second quarter PDL BioPharma received royalties on sales achieved by the above mentioned drugs during the sequentially preceding quarter. Avastin sales were affected by the regulatory and reimbursement uncertainty surrounding the metastatic breast cancer indication of the drug.

General and administrative (G&A) expenses were $3.8 million in the reported quarter, down 56.8% from $8.8 million in the prior-year quarter. In early 2011, PDL BioPharma resolved its legal disputes with Novartis, UCB Pharma ( UCBJF ) 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.

Our Recommendation

Currently, we have an Outperform recommendation on PDL BioPharma. The stock however carries a Zacks #3 Rank (“Hold”) in the short term. Overall, we are encouraged by PDL BioPharma’s recent progress in resolving multiple disagreements with Novartis, UCB Pharma and European Patent Office’s decision to uphold the validity of the European patents. The litigation with Roche, however, continues. The recent favorable Nevada ruling is encouraging which could lead to a relatively swift resolution of the Roche challenge. Overall, we believe that PDL BioPharma has an upper hand in the case.