PDL BioPharma, Inc. (NASDAQ: PDLI) Q3 2020 earnings call dated Nov. 11, 2020
Corporate Participants:
Jody Cain — Senior Vice President, LHA
Dominique Monnet — President and Chief Executive Officer
Ed Imbrogno — Vice President and Chief Financial Officer
Analysts:
Phil Nadeau — Cowen & Co. — Analyst
Presentation:
Operator
Good afternoon and welcome to the PDL BioPharma 2020 Third Quarter Conference Call. [Operator Instructions]
I would now like to turn the conference over to Jody Cain. Please go ahead.
Jody Cain — Senior Vice President, LHA
This is Jody Cain with LHA. Thank you 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; Edward Imbrogno, Vice President and CFO; and Chris Stone, Vice President and General Counsel.
Please turn to Slide 2 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. In particular, there is significant uncertainty about the duration and potential impact of the COVID-19 pandemic. This means that results could change at any time and the impact of the COVID-19 pandemic on PDL’s operations, financial results and outlook is the best estimate based upon information available for today’s discussion. 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 conference call should be considered accurate only as of the date of the live broadcast, November 11, 2020. 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.
Now I’d like to turn the call over to Dominique Monnet.
Dominique Monnet — President and Chief Executive Officer
Thanks, Jody and good afternoon everyone and thank you for joining us. We have continued to make exceptional progress as we move toward dissolution of the Company. We will begin by recapping transaction announced since our last quarterly conference call and then discuss where we are in the process of monetizing our remaining assets and the path forward in dissolving the Company.
Please turn to Slide 3. This past quarter and recent weeks were indeed very productive. With the closing of the sale of our Noden pharmaceutical business in September and the spin-off of LENSAR to PDL stockholders on October 1st, we completed the monetization of our operating businesses.
Our sale of a basket of royalties to SWK Holdings considerably simplified our remaining asset portfolio and placed PDL in a position to take advantage of the tax benefits provided by the CARES Act. We entered into a settlement agreement with Wellstat in August and we are confident that this agreement will enable us to reach closure and collect on this important receivable. Finally, we received notices in this quarter to convert $11.2 million par value of our convertible notes due in December 2021, representing 81% of the remaining 2021 notes. After this conversion period only $3.6 million of the original $150 million of the 2021 and 2024 convertible notes in aggregate will remain outstanding.
Starting with Noden on Slide 4. In early September, we closed the sale of our previously wholly-owned subsidiaries Noden Pharma DAC and Noden Pharma USA to the private equity partnership Stanley Capital. We announced this agreement in late July with an anticipated total transaction value of up to $48.25 million. We closed this transaction with payments to PDL of up to $52.83 million which is $4.6 million higher than originally announced due primarily to the incremental cash accumulated in the business between the signing and closing dates.
Under the terms of this transaction, we received a $12.2 million payment upon closing. We are also due to receive an additional $0.52 million for reimbursement of VAT in 2021. The transaction provides for an additional $33 million to be paid to PDL in 12 equal quarterly installments from January 2021 to October 2023 and two potential contingent payments totaling $3.25 million. An additional $3.86 million is to be paid to PDL in four equal quarterly installments from January 2023 to October 2023. We anticipate that these future payments will be processed and distributed to stockholders during our three-year post dissolution period, which I will discuss in a moment.
In addition to the cash proceeds from the sale, we believe the transaction may qualify for some federal tax benefit under the CARES Act. The CARES Act was passed into law in late March and permits taxpayers to carry back five years any net ordinary losses arising in the taxable year beginning in 2018, 2019 or 2020. In connection with our monetization process we expect to recognize ordinary tax losses that under the CARES Act could be applied to prior tax years in which PDL was a substantial taxpayer. Ed will discuss this in greater detail in a moment.
I wish to thank our financial advisors, Torreya Partners and SVB Leerink along with PDL’s Board of Directors and our management team for executing the Noden transaction. You may recall that Torreya was retained by PDL to explore potential strategic transactions and assist in the disposition of Noden while SVB Leerink was engaged to advise on overall liquidation and distribution strategies.
Turning to LENSAR on Slide 5. Following a comprehensive strategy process conducted in partnership with SVB Leerink PDL’s Board reached the decision to spin off PDL’s 81% holding in LENSAR to our stockholders.
Net assets attributable to LENSAR on September 30th, 2020 were $112.4 million. We affected the spin-off in the form of a dividend involving the distribution of all outstanding shares held by PDL to holders of PDL common stock. We completed the distribution on October 1st, one day prior to LENSAR becoming a publicly traded entity on the NASDAQ.
Similar to our share distribution in Evofem Biosciences last May that proved to serve PDL stockholders very well, the distribution of LENSAR share enables our stockholders to reach their own decision regarding their investment in LENSAR. We believe that LENSAR is appropriately resourced to pursue the development and launch of its next generation system ALLY and that it will be well positioned to resume its growth trajectory post COVID-19.
Now, on Slide 6. We announced a settlement agreement this past August resolving the previously reported litigation relating to loans made to Wellstat Diagnostics by PDL. The loans totaling $44.1 million were made in August 2013 and the notes were carried on PDL balance sheet for $51.4 million as of the end of the second quarter. Under the terms of the settlement agreement Wellstat Parties paid PDL $7.5 million at the time of signing. The Wellstat Parties have the option of paying either $5 million by February 10, 2021 and $55 million by July 26, 2021 or paying $67.5 million by July 26th, 2021. If the Wellstat Parties fail to make payments in full by July 26, 2021, the Company shall be authorized to record and confess judgment against the Wellstat Parties for an amount of $92.5 million or a lesser amount as may be owed under the agreement. We are pleased — very pleased to have reached this settlement with the Wellstat Parties. I commend our legal team at PDL for their tenacity in bringing the Wellstat litigation to this successful resolution.
Let’s now review progress with our royalty assets on Slide 7. In August, we announced the sale of our Kybella, Zalviso and Coflex royalty rights to SWK Holdings Corporation for $4.35 million in cash. In addition to the cash proceeds from the sale to SWK, we believe this transaction may also qualify for federal tax benefit under the CARES Act.
Our remaining royalty portfolio includes Glumetza, Jentadueto XR, Invokamet XR and Synjardy XR which are collectively called the Assertio royalties as well as our royalty interest in Cerdelga. These remaining royalties have performed well, generating cash earnings of $17.4 million in Q3 versus $11.2 million in Q2 and $13.2 million in Q1 of this year. We continue to evaluate the sale of these high-value assets under the advisement of BofA Securities.
Alternatively if we’re unable to secure appropriate value for the sale at this time, we may retain these assets and ultimately distribute royalty revenues to our stockholders.
We hold 3.3 million Evofem warrants. Each warrant can be exercised for one share of Evofem common stock at $6.38 per share. Evofem is in the early phase of commercializing Phexxi for the prevention of pregnancy. We are monitoring Evofem and we will determine the disposition of the warrants at a time we believe will maximize the value for our stockholders.
Turning to next steps on Slide 8. At our 2020 Annual Meeting of Stockholders held in August, we announced approval for proposal to file for Certificate of Dissolution with the State of Delaware. We were very pleased to receive the overwhelming support of our stockholders as we believe the scores [Phonetic] will allow for the efficient wind down of the Company’s operations. I am now pleased to announce that the PDL Board has decided to have the Certificate of Dissolution filed on January 4th, 2021.
Let me highlight a few important points associated with the dissolution process which we noted in our earnings release. Per Delaware Law, PDL will continue its existence for minimum of three years after filing the Certificate of Dissolution solely for wind down purposes, including managing potential litigations, resolving any claims and disputes, monetizing any remaining assets and distributing to its stockholders of proceeds of its liquidation process.
Before distributions are made to PDL stockholders, we will follow the Safe Harbor Procedures and the Delaware Law to resolve current, contingent and likely unknown claims against the Company. Generally and importantly the Safe Harbor procedures reduce the potential liability of the Company’s stockholders and Directors from future claims. Under the Safe Harbor procedures PDL will petition the Delaware Court of Chancery to determine the amount and form of security that will be set aside before distributions are made to PDL stockholders. Upon completion of the Safe Harbor procedures, we plan to distribute PDL’s remaining assets to our stockholders. Please note that we do not anticipate making any distribution to our stockholders before the Safe Harbor procedures are completed. The Safe Harbor procedures usually take 12 to 18 months to complete but it could take longer.
Dissolution will allow the Company to reduce overhead expenses as PDL will no longer be a publicly traded company. It is important to emphasize that we continue to work hard to reduce the operating expenses even before we enter dissolution. But also the first 12 to 18 months following dissolution will continue to require appropriate resources to complete the Safe Harbor procedures, the filing of the SEC reports and tax return, the monetization of remaining assets and the resolution of various issues in the liabilities, including the audit of our tax returns for the year 2009 through 2018 by the California Franchise Tax Board.
Finally, we will engage with NASDAQ regarding the delisting of the Company’s common stock after market close on December 31st, 2020. We do not anticipate transferring into OTC trading. Our transfer book will close as of the filing of the certificate of dissolution expected as mentioned to occur on January 4th, 2021 and this will be the final record date.
It is anticipated that any distribution made in connection with the dissolution will be made pro rata to the stockholders of record as of the final record date. No further trading of PDL common stock will occur after the final record date.
Turning to Slide 9. As Ed will discuss, the approval of the Plan of Dissolution shifted the reporting of our financial to liquidation basis of accounting starting on September 1st. Let me provide the top lines of our net assets in liquidation. At the end of the third quarter, just prior to LENSAR spin-off, PDL’s net assets in liquidation were $494.7 million. Net assets attributable to LENSAR on September 30th were $112.4 million. Excluding LENSAR’s assets and liabilities, PDL’s net assets in liquidations were $382.3 million or $3.35 per share of common PDL stock outstanding. Of course, there is no guarantee that we will be able to fully capture this value and distribute it to our stockholders, but this remains our focus.
Now, I’d like to turn the call over to Ed Imbrogno to discuss our financials in greater details. Ed?
Ed Imbrogno — Vice President and Chief Financial Officer
Thank you, Dominique. As a result of stockholder approval to pursue dissolution on September 1st, we transitioned our accounting from the going concern basis of accounting to liquidation basis of accounting in accordance with US Generally Accepted Accounting Principles. Broadly speaking, asset values under the going concern basis reference historical costs with some notable exceptions as it pertains to PDL to apply fair value accounting.
Under liquidation basis all assets are stated at their estimated liquidation value. Contractual liabilities are measured in accordance with applicable GAAP and all other liabilities are recorded at their estimated settlement amounts over the expected liquidation period. This includes costs associated with implementing the wind down of the Company.
To give some concrete examples to this transition, following the summary of how certain assets and liabilities were valued previously under the going concern basis of accounting to how they are now valued under liquidation basis of accounting. Under going concern accounting PDL’s royalty assets were valued based on discounted cash flow models. Royalty assets are now valued using undiscounted cash receipts until an assumed sales date, currently expected in the first half of 2021, plus a discounted value for the expected consideration to be received upon the sale.
The receivable from the sale of Noden was discounted under the going concern basis, that is now undiscounted under liquidation basis. The going concern basis would generally require expensing costs as they are incurred. Under the liquidation basis of accounting the estimated costs to be incurred through dissolution have been accrued. And certain assets that will not be converted to cash such as prepaid expenses are written off.
And very specific to PDL, because the spin-off of LENSAR did not incur until early Q4, historical cost basis in LENSAR under the going concern basis of accounting has been written off under liquidation basis of accounting to its estimated enterprise value on the spin-off. This increase in value is reflected in intangible assets as of September 30th.
With this as background, given the adoption of the liquidation basis, the results of operations for the three and nine months ended September 30, 2020 are not comparable to prior-year periods or with other interim periods in the current year presented under the going concern basis primarily due to the different accounting methods.
Now, turning to the financial statements. Slide 10 includes the results of operations for the two and eight months ended August 31st, 2020 and the three and nine months ended September 30, 2019 under the going concern basis of accounting. Due to classification of certain assets and liabilities as held for sale and as discontinued operations, the numbers presented for continuing operations in this table for most of the revenues and certain of our operating expenses reflect almost exclusively LENSAR’s operations. The exceptions to this are general and administrative costs, which include corporate costs and to a lesser LENSAR’s SG&A cost and the severance and retention operating expense which is exclusively attributable to corporate.
We have continued to incur higher G&A expenses due to higher professional fees associated with our monetization plan. But we expect these costs to decrease going forward with the significant progress made in executing our plan.
For non-operating expenses, decreases in interest income and interest expense reflect reduced cash on hand and lower outstanding debt. The loss of investment for the two and eight months ended August 31st, 2020 reflects the write-down of our investment in LCI [Phonetic] which came to us via our investment in LENSAR.
Our pre-tax income from discontinued operations was not significant in the two-month period ending August 31st. As operations classified as discontinued were adjusted to the lower of the carrying value or their expected value less selling costs in prior periods. As the related assets were disposed there were no significant adjustments to report.
Our income tax provision for both current year periods ended August 31st reflects a benefit due to current year losses and expected utilization of our NOLs under the CARES Act.
On Slide 11 is the condensed consolidated statement of net assets presented under the liquidation basis of accounting. The values of PDL assets include our estimate of income to be generated from the remaining assets until the assumed data of sale and the expected sale of proceeds. The values of PDL’s liabilities include estimates for operating expenses and expected amounts required to settle liabilities.
It is important to note that if LENSAR was not spun off until October 1st, many of the assets and liabilities presented in the consolidated statement of net assets include both LENSAR and non-LENSAR amounts or in some cases are solely attributable to LENSAR prior to the spin-off. For this reason and due to the significance of these amounts, we have presented a pro forma statement of net assets, excluding LENSAR.
Total consolidated assets as of September 30, 2020 were $604 million and primarily consists of our remaining royalty assets, cash and cash equivalents and the tax receivable reflecting both amounts expected to be refunded under the CARES Act and an anticipated refund of prior year overpayment. LENSAR’s assets totaled $115.2 million of this amount.
The CARES Act receivable included in the consolidated statement of net assets as of September 30, 2020 is $80.5 million and includes in addition to the losses from operations, ordinary losses incurred on the Noden transaction and on the sale of the royalty assets. Please note that this figure does not reflect the impact of the expected gain to be recorded by PDL as part of the LENSAR our spin-off as this gain will be recorded in the fourth quarter.
By itself this gain from the LENSAR spin-off is expected to reduce our CARES Act receivable by $11.8 million. There can be no assurance as to when and to what extent such tax benefits may be realized.
Total consolidated liabilities as of September 30, 2020 were $109.3 million and consisted primarily of amounts accrued for an ongoing audit by the California Franchise Tax Board for the tax years 2009 through 2015, amounts owed under our convertible notes and amounts accrued for estimated operating expenses to be incurred through dissolution.
As of September 30, 2020 net assets and liquidation excluding LENSAR totaled $382.8 million. It is important to note that the actual amounts realized for assets and settlement of liabilities and the actual cost of liquidation could differ materially from the estimated amounts.
Pursuant to the stockholders’ approval of Plan of Dissolution, a fundamental change provision under PDL’s convertible note indentures was triggered that enabled bondholders to tender their bonds for cash settlement or alternatively to exercise their conversion rights under the indentures. No bonds were tendered to us for payment. The bondholders holding $11.2 million par value of the 2021 convertible notes exercised their conversion rights. We intend to settle the conversion of these notes entirely with cash on hand which will occur near the end of the fourth quarter of 2020. After these bonds are repaid, we will have $3.6 million par value of convertible notes outstanding.
Now on Slide 12 is a breakdown by product of net cash from all royalty rights. For the three months ended September 30, 2020 cash from royalty rights was $17.6 million, which is down 31% from $25.6 million for the prior-year three-month period. Excluding the cash received from those royalties that were sold in the third quarter to SWK Holdings, cash received was $17.4 million for the three months ended September 30, 2020 compared to $25.2 million for the three months ended September 30, 2019.
For the nine months ended September 30, 2020 cash from royalty rights was $42.6 million which is down 27% from $58.3 million for the prior-year nine-month period. Excluding those royalties that were sold in Q3 to SWK Holdings, cash received in the nine months ended September 30, 2020 was $41.8 million as compared to $57.2 million in the nine months ended September 30, 2019.
As you may remember from earlier calls, the decrease in cash receipts in the current year periods relative to the prior-year periods largely reflects the reduced net selling price for Glumetza.
Okay, operator, we are ready to take questions.
Questions and Answers:
Operator
[Operator Instructions]
Dominique Monnet — President and Chief Executive Officer
Thank you, operator. This is Dominique Monnet. While we are waiting for the first question, I want to thank our team at PDL, our Board and our advisors for the significant progress we have made in quite a short time to execute our strategy. And I’d like to thank our stockholders for their support and analysts also for their support in approving and accompanying us again along this journey and for our shareholders in approving the Plan of Dissolution. This is sitting out a roadmap for an orderly liquidation process.
Okay. operator, I think we are ready for questions.
Operator
Our first question comes from Phil Nadeau of Cowen & Company.
Dominique Monnet — President and Chief Executive Officer
Hello, Phil.
Phil Nadeau — Cowen & Co. — Analyst
Hi. Good afternoon. Thanks for taking my question.
Dominique Monnet — President and Chief Executive Officer
Good afternoon.
Phil Nadeau — Cowen & Co. — Analyst
And congrats on all the progress in executing on the liquidation. I should add as it sounds like this is going to be the last quarterly call that it’s been great working with you guys over the years.
Dominique Monnet — President and Chief Executive Officer
Likewise.
Phil Nadeau — Cowen & Co. — Analyst
Just two questions for me. First is on the tax asset. Is any portion of that independently tradable from your other assets? Is there any value that can be extracted away from the other assets that you have or is all the value in relation to reducing the taxes on the assets in your — the rest of the assets in your portfolio?
Dominique Monnet — President and Chief Executive Officer
Ed, do you want to take the question? I’d be happy to build on that.
Ed Imbrogno — Vice President and Chief Financial Officer
Yeah. So if I’m tracking correctly with the question, the NOL utilization is, we had losses that occurred [Phonetic] without the ability to offset. But now that we can go back under this CARES Act and seek a refund, PDL paid a significant amount of taxes in earlier years. That asset is somewhat stand-alone, but it was predicated on our operations and on the sale of our — certain of our assets. So by itself I don’t know that you consider it tradable separately. As we go forward, our ability to use the remaining NOLs will depend of course on the income that we may generate. But that’s — that’s how I would see it. And I’m not sure if I am specifically answering your question, but I see it the part and parcel to our operations right now.
Phil Nadeau — Cowen & Co. — Analyst
I see. Okay. So if I heard you correctly, the sale of LENSAR is going to reduce the asset by about $11 million — so — versus the, call it, $77 million on — that’s recorded on September 30th. Would that suggest you have about $66 million that could come back to you from prior losses or is that too much because [Speech Overlap] future?
Ed Imbrogno — Vice President and Chief Financial Officer
That’s — we do track — there is a table that shows our income tax receivable. It might be worth looking at. The little — that is not exclusively NOLs.
Phil Nadeau — Cowen & Co. — Analyst
Okay.
Ed Imbrogno — Vice President and Chief Financial Officer
There’s roughly $8 million or so that includes a separate receivable. But if you take what’s left as of September 30 and reduce it by the $11.8 million for the expected decrease due to LENSAR spin, that would tell you what the NOL value is as of September 30 on a pro forma basis.
Phil Nadeau — Cowen & Co. — Analyst
Okay. That is very helpful. Thank you. And then second question is actually on the assumptions that underlie the value of the royalty assets. Obviously Glumetza and the other products have been evolving over time. Would you be able to give us some of the assumptions that you use in terms of future revenue and durability of that revenue that underlie to $227 million shown on Slide 11 or is that something you’re going to keep proprietary?
Ed Imbrogno — Vice President and Chief Financial Officer
Yeah. We haven’t really shared our underlying assumptions before. I would say this so that our model we’ve always viewed and looked at our cash flows into the future. And we inform them from time to time with an independent third party to the extent we feel it’s appropriate timing to do so.
In the case of transitioning to liquidation basis of accounting, we now have that model on an undiscounted basis. But we’re — under liquidation accounting we stop at a certain point to say, okay, here’s a sale. So then you add to the value that you would receive up until that point in time and you look forward at the remaining estimated cash flows and you discount them back under the presumption that that’s what a third party would pay at that particular point. When you add it two together you come up with your valuation. But we’ve had discount rates we’ve disclosed before with certain of our assets. We haven’t really shared the estimated cash flows previously, something that I can — certainly Dominique and I and others can discuss. But at this point we weren’t prepared to share the assumptions.
Dominique Monnet — President and Chief Executive Officer
Yeah.
Phil Nadeau — Cowen & Co. — Analyst
Fair enough. Sorry, go ahead.
Dominique Monnet — President and Chief Executive Officer
Yeah. No, I would just echo that. And we have used, and it was driven by our financial teams, a certain model which we have kept constant, updating it pretty much every year using these external resources or research firm to be able to inform it. When we engaged into the sale process we adopted a similar process but independent. And ultimately we ended up with numbers which were quite similar. This being said, we are not sharing. We haven’t done that in the past. I don’t think it helps very much to start now to look at them drug by drug. I’m sure you’re well informed of that. There have been some situation. But I think what has been very — I would say, which has increased our confidence. So at least maintain our confidence in that portfolio of assets of value asset is that they have remained performing as we expected this year. As always, a little jumpy. Sometimes it goes a little bit higher, sometimes it’s lower.
We had a very good third quarter, but again the major thing for us is when it was aligned through these fluctuations you end up with pretty much where we expected the value to be. This is why — if we cannot capture these value as we have messaged, and we would like to and I think we will continue to pursue a sale process, but if we do note, then we feel we would serve our shareholder well in keeping them in the dissolved entity and maybe ultimately in a liquidation trust, whatever is going to be able to minimize the cost associated with the management of all that.
Phil Nadeau — Cowen & Co. — Analyst
Perfect. Thanks for taking my questions. And again, congrats on the progress in the liquidation process.
Dominique Monnet — President and Chief Executive Officer
Well, thank you, Phil and thanks to came too [Phonetic]. I think, as you say, it’s probably going to be our last call. It was a pleasure to partner with you over the years. So thank you.
Phil Nadeau — Cowen & Co. — Analyst
My pleasure. [Phonetic] Thank you.
Operator
[Operator Instructinos] Seeing no further questions, this concludes the question-and-answer session. I would now like to turn the conference back over to Dominique Monnet for any closing remarks.
Dominique Monnet — President and Chief Executive Officer
Well, again thank you all for joining us today and for being shareholders and — of PDL over these years. I think it is indeed probably our last earnings call. I think we do believe that as we get into the dissolution we probably will have further reporting that we will continue to do. Obviously, we will keep everybody involved. But I am not sure because we will no longer be a public company that we will be holding such calls. We will, as I said, make sure that you could be kept informed of the performance of our ongoing monetization process and liquidation process. In the meantime, we hope you and your families stay safe and we wish you a wonderful rest of your day.
Operator
[Operator Closing Remarks]