PDLI Beats by a Penny on Lower Costs

PDL BioPharma Inc. ( PDLI - Analyst Report ) posted third quarter earnings of 28 cents per share, 3 cents above the year-ago figure of 25 cents and a penny above the Zacks Consensus Estimate of 27 cents. Lower general and administrative expenses offset the decline in revenue to drive earnings in the quarter.

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, Xolair and Herceptin; Roche and Novartis’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 third-quarter 2011 revenue of $83.8 million, representing a decrease of 3.0% over the year-ago revenue of $86.4 million. Revenue slightly edged past the Zacks Consensus Estimate and the preliminary guidance of $83 million. The preliminary guidance was provided by the company in September this year. The fourth quarter revenue includes a milestone payment of $4.0 million from Roche.

Increased royalties in the quarter from higher sales of Herceptin, Lucentis and Tysabri were offset by reduced royalty from Avastin sales. Avastin sales were affected by the regulatory and reimbursement uncertainty surrounding the metastatic breast cancer indication of the drug, thus resulting in lower royalty to PDL. Also, contributing to the decline was lower average royalty rate on Roche’s products, as a higher proportion was generated from products made or sold in the US, which generates lower royalties than outside US based sales.

In the third quarter PDL BioPharma received royalties on sales achieved by the above mentioned drugs during the second quarter of 2011.

Beginning from the second quarter, PDL pays a portion of royalties it receives on Lucentis sales outside the US back to Novartis under its settlement agreement with the latter, which the companies had entered into in February 2011. The third quarter revenue is net of this payment.

General and administrative (G&A) expenses were $4.0 million in the reported quarter, down approximately 64.0% from $11.1 million in the prior-year quarter. In early 2011, PDL BioPharma resolved its legal disputes with Novartis, UCB Pharma ( UCBJF ) and 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.

Management is seeking additional revenue streams or assets in the range of $75 million to $150 million in purchase price to increase shareholder value as expiration of Queen et al. patent portfolio approaches in 2014.

Our Recommendation

Currently, we have a Neutral recommendation on PDL BioPharma. The stock carries a Zacks #3 Rank (“Hold”) in the short term. Overall, we are encouraged by PDL BioPharma’s progress in resolving multiple disagreements with Novartis, UCB Pharma and European Patent Office’s decision to uphold the validity of the European patents. Nonetheless, the litigation with Roche continues. Overall, though we believe that PDL BioPharma has an upper hand in the case, we prefer to remain on the sidelines until the final resolution of the litigation.