Assistant Managing Editor

PDL BioPharma Inc., which promised significant returns to shareholders since adopting an unusual royalty-collecting business model following last year's spinoff of its R&D division, has opted to monetize a percentage of its antibody royalties from Genentech Inc. products to return a special cash dividend by year-end.

That could help assuage some lingering investor wariness over PDL's business structure following last year's reorganization.

Under pressure from shareholders, concerned that the company's lucrative royalty stream from its antibody patent portfolio could be lost amid hefty expenses associated with the much riskier R&D side, PDL's then-management chose to break off its R&D activities into a new company, Facet Biotech Corp. (now embroiled in a hostile takeover battle with Biogen Idec Inc.) (See BioWorld Today, April 14, 2008.)

The remaining - and substantially downsized - PDL retained the patent portfolio, royalty stream and set a goal of returning cash to shareholders, an almost unheard-of idea in the biotech sector.

"At the outset, some were skeptical that we would or could deliver on that mission," John McLaughlin, PDL's president and CEO, told investors during the firm's earnings call.

So far this year, the company has come through. In April, it paid a dividend of 50 cents per share to stockholders, totaling $59.7 million, with a second dividend of the same amount paid Oct. 1.

And, as the credit markets began to reopen early this year, PDL started looking for ways to monetize its royalty stream, ultimately deciding on a $300 million securitization transaction since it allows the firm to leverage future income with a note that essentially is "collaterized," in this case, by 60 percent of royalties from antibody products sold by Genentech (now part of Roche AG), McLaughlin said.

PDL's not the first firm to look at monetizing royalties, and in uncertain markets, it's likely to become more common, especially since it provides access to nondilutive financing. But in most cases, those firms are desperately seeking cash to push development programs to the next inflection point.

Last year, Lexington, Mass.-based Indevus Pharmaceuticals Inc., for example, completed a $105 million private placement of nonrecourse notes secured by royalties of overactive bladder products Sanctura and Sanctura XR, the proceeds of which were intended to pay off debt and fund the company's operations into 2010. (See BioWorld Today, Aug. 27, 2008.)

PDL, on the other hand, expects a "sizeable portion" of the net offerings from its securitization deal to pay the special cash dividend to shareholders. The precise amount will be determined at the upcoming board meeting, but McLaughlin said the money will be distributed before the end of this year.

Analyst Bret Holley, of Oppenheimer & Co., estimated that the dividend will amount to about $2 per share, and, though he cautioned in a research note that the deal comes at a cost - namely a 10.25 percent annual interest rate on the notes - he called it a "favorable one" for shareholders.

Under the terms, PDL is issuing senior secured notes due 2015 in a nonregistered offering to newly created subsidiary QHP Royalty Sub LLC - set up to protect noteholders in case the parent company hits bankruptcy - with 60 percent of royalties from Genentech's Avastin (bevacizumab), Herceptin (trastuzumab), Lucentis (ranibizumab) and Xolair (omalizumab) going to pay off those notes.

The remaining 40 percent of royalties would continue flowing into PDL.

Terms also allow for 60 percent of royalties from any future products to be included, but McLaughlin acknowledged that the short duration of the note - PDL said two years based on cash flow projections even though the note doesn't mature until 2015 - makes it unlikely that any additional products will be added.

Avastin sales in 2008 totaled $4.9 billion, with royalties to PDL of $75.9 million, while total Herceptin sales of $4.8 billion resulted in $98.6 million in royalties and Lucentis sales of $1.8 billion resulted in $27.9 million in royalties. Sales of Xolair totaled $700 million, with $13.9 million paid to PDL in 2008.

PDL used to earn royalties from the sale of Raptiva (efalizumab), as well, but South San Francisco-based Genentech pulled the psoriasis drug from shelves in April following reports of progressive multifocal leukoencephalopathy. (See BioWorld Today, April 10, 2009.)

McLauglin added that its securitization deal does not preclude PDL from considering other royalty-monetizing transactions, including a potential royalty sale. The firm has been in talks with potential royalty buyers and licensees, and "we will continue to have those conversations," he said. "But this was the best option at the time."

PDL, which posted net income of $46.4 million, or 29 cents per share - beating analyst estimates by 3 cents - ended the third quarter with $222.4 million in cash, though that does not include the Oct. 1 dividend payout.

Shares of PDL (NASDAQ:PDLI) closed at $7.98 Wednesday, down 35 cents.

Published  October 29, 2009