ITEM 1. FINANCIAL STATEMENTS
PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Revenues
|
|
|
|
|
|
|
|
|
Royalties from Queen et al. patents
|
|
$
|
115,066
|
|
|
$
|
143,617
|
|
|
$
|
231,092
|
|
|
$
|
235,464
|
|
Royalty rights - change in fair value
|
|
34,498
|
|
|
—
|
|
|
46,205
|
|
|
—
|
|
Interest revenue
|
|
12,613
|
|
|
4,903
|
|
|
21,684
|
|
|
8,651
|
|
License and other
|
|
575
|
|
|
—
|
|
|
575
|
|
|
—
|
|
Total revenues
|
|
162,752
|
|
|
148,520
|
|
|
299,556
|
|
|
244,115
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
6,920
|
|
|
6,783
|
|
|
11,502
|
|
|
13,969
|
|
Operating income
|
|
155,832
|
|
|
141,737
|
|
|
288,054
|
|
|
230,146
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
82
|
|
|
60
|
|
|
132
|
|
|
150
|
|
Interest expense
|
|
(9,858
|
)
|
|
(6,051
|
)
|
|
(20,383
|
)
|
|
(12,051
|
)
|
Loss on extinguishment of debt
|
|
—
|
|
|
—
|
|
|
(6,143
|
)
|
|
—
|
|
Total non-operating expense, net
|
|
(9,776
|
)
|
|
(5,991
|
)
|
|
(26,394
|
)
|
|
(11,901
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
146,056
|
|
|
135,746
|
|
|
261,660
|
|
|
218,245
|
|
Income tax expense
|
|
54,001
|
|
|
42,004
|
|
|
96,722
|
|
|
71,032
|
|
Net income
|
|
$
|
92,055
|
|
|
$
|
93,742
|
|
|
$
|
164,938
|
|
|
$
|
147,213
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.57
|
|
|
$
|
0.67
|
|
|
$
|
1.06
|
|
|
$
|
1.05
|
|
Diluted
|
|
$
|
0.52
|
|
|
$
|
0.62
|
|
|
$
|
0.94
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
160,256
|
|
|
139,825
|
|
|
155,752
|
|
|
139,821
|
|
Diluted
|
|
177,228
|
|
|
152,224
|
|
|
175,811
|
|
|
152,784
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.60
|
|
|
$
|
0.60
|
|
See accompanying notes.
PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
92,055
|
|
|
$
|
93,742
|
|
|
$
|
164,938
|
|
|
$
|
147,213
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on investments in available-for-sale securities:
|
|
|
|
|
|
|
|
|
Change in fair value of investments in available-for-sale securities, net of tax
|
|
(204
|
)
|
|
(3
|
)
|
|
(1,296
|
)
|
|
(6
|
)
|
Adjustment for net (gains) losses realized and included in net income, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total change in unrealized gains on investments in available-for-sale securities, net of tax
(a)
|
|
(204
|
)
|
|
(3
|
)
|
|
(1,296
|
)
|
|
(6
|
)
|
Change in unrealized losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow hedges, net of tax
|
|
264
|
|
|
(1,265
|
)
|
|
331
|
|
|
2,302
|
|
Adjustment for net (gains) losses realized and included in net income, net of tax
|
|
2,027
|
|
|
(268
|
)
|
|
2,755
|
|
|
979
|
|
Total change in unrealized losses on cash flow hedges, net of tax
(b)
|
|
2,291
|
|
|
(1,533
|
)
|
|
3,086
|
|
|
3,281
|
|
Total other comprehensive income (loss), net of tax
|
|
2,087
|
|
|
(1,536
|
)
|
|
1,790
|
|
|
3,275
|
|
Comprehensive income
|
|
$
|
94,142
|
|
|
$
|
92,206
|
|
|
$
|
166,728
|
|
|
$
|
150,488
|
|
______________________________________________
(a)
Net of tax of
($110)
and
($2)
for the
three months ended June 30, 2014
and
2013
, respectively, and
$(698)
and
($3)
for the
six months ended June 30, 2014
, and
2013
, respectively.
(b)
Net of tax of
$1,234
and
($825)
for the
three months ended June 30, 2014
and
2013
, respectively, and
$1,662
and
$1,767
for the
six months ended June 30, 2014
, and
2013
, respectively.
See accompanying notes.
PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2014
|
|
2013
|
|
(unaudited)
|
|
(Note 1)
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
214,525
|
|
|
$
|
94,302
|
|
Short-term investments
|
3,243
|
|
|
5,238
|
|
Receivables from licensees and other
|
1,352
|
|
|
300
|
|
Deferred tax assets
|
2,535
|
|
|
377
|
|
Notes receivable
|
6,599
|
|
|
1,208
|
|
Prepaid and other current assets
|
1,793
|
|
|
6,272
|
|
Total current assets
|
230,047
|
|
|
107,697
|
|
|
|
|
|
Property and equipment, net
|
69
|
|
|
41
|
|
Royalty rights - at fair value
|
247,116
|
|
|
235,677
|
|
Notes and other receivables, long-term
|
413,720
|
|
|
193,840
|
|
Long-term deferred tax assets
|
17,395
|
|
|
6,700
|
|
Other assets
|
8,058
|
|
|
—
|
|
Total assets
|
$
|
916,405
|
|
|
$
|
543,955
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
341
|
|
|
$
|
287
|
|
Accrued liabilities
|
61,935
|
|
|
11,857
|
|
Accrued income taxes
|
10,817
|
|
|
—
|
|
Term loan payable
|
37,364
|
|
|
74,397
|
|
Convertible notes payable
|
197,957
|
|
|
320,883
|
|
Total current liabilities
|
308,414
|
|
|
407,424
|
|
|
|
|
|
Convertible notes payable
|
272,824
|
|
|
—
|
|
Other long-term liabilities
|
38,506
|
|
|
23,042
|
|
Total liabilities
|
619,744
|
|
|
430,466
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
Preferred stock, par value $0.01 per share, 10,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, par value $0.01 per share, 350,000 shares authorized; 160,266 and 139,935 shares issued and outstanding at June 30, 2014, and December 31, 2013, respectively
|
1,603
|
|
|
1,399
|
|
Additional paid-in capital
|
(120,590
|
)
|
|
(233,173
|
)
|
Accumulated other comprehensive loss
|
(3,098
|
)
|
|
(4,888
|
)
|
Retained earnings
|
418,746
|
|
|
350,151
|
|
Total stockholders' equity
|
296,661
|
|
|
113,489
|
|
Total liabilities and stockholders' equity
|
$
|
916,405
|
|
|
$
|
543,955
|
|
See accompanying notes.
PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
Cash flows from operating activities
|
|
|
|
Net income
|
$
|
164,938
|
|
|
$
|
147,213
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Amortization of convertible notes and term loan offering costs
|
9,568
|
|
|
6,552
|
|
Change in fair value of royalty rights - at fair value
|
(45,390
|
)
|
|
—
|
|
Loss on extinguishment of convertible notes
|
6,143
|
|
|
—
|
|
Other amortization, depreciation and accretion of embedded derivative
|
(94
|
)
|
|
(214
|
)
|
Hedge ineffectiveness on foreign exchange contracts
|
(3
|
)
|
|
(5
|
)
|
Stock-based compensation expense
|
616
|
|
|
373
|
|
Tax expense from stock-based compensation arrangements
|
—
|
|
|
(13
|
)
|
Deferred income taxes
|
(2,564
|
)
|
|
(548
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
Receivables from licensees and other
|
(1,052
|
)
|
|
366
|
|
Prepaid and other current assets
|
1,759
|
|
|
1,156
|
|
Accrued interest on notes receivable
|
(10,165
|
)
|
|
(5,339
|
)
|
Other assets
|
(29
|
)
|
|
935
|
|
Accounts payable
|
54
|
|
|
(959
|
)
|
Accrued liabilities
|
4,426
|
|
|
(290
|
)
|
Accrued income taxes
|
10,817
|
|
|
18,753
|
|
Other long-term liabilities
|
7,129
|
|
|
(5,271
|
)
|
Net cash provided by operating activities
|
146,153
|
|
|
162,709
|
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of investments
|
—
|
|
|
(6,375
|
)
|
Maturities of investments
|
—
|
|
|
16,405
|
|
Purchase of royalty rights - at fair value
|
(15,500
|
)
|
|
—
|
|
Proceeds from royalty rights - at fair value
|
49,451
|
|
|
—
|
|
Purchase of notes receivable
|
(215,000
|
)
|
|
(27,304
|
)
|
Repayment of notes receivable
|
—
|
|
|
16,779
|
|
Purchase of property and equipment
|
(39
|
)
|
|
(2
|
)
|
Net cash used in investing activities
|
(181,088
|
)
|
|
(497
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Repurchase of convertible notes
|
(29,906
|
)
|
|
—
|
|
Proceeds from the issuance of convertible notes, net
|
300,000
|
|
|
—
|
|
Payment of debt issuance costs
|
(9,824
|
)
|
|
—
|
|
Purchase of call options
|
(30,951
|
)
|
|
—
|
|
Proceeds from the issuance of warrants
|
11,427
|
|
|
—
|
|
Repayment of term loan
|
(37,500
|
)
|
|
—
|
|
Cash dividends paid
|
(48,088
|
)
|
|
(41,964
|
)
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
13
|
|
Net cash provided by/(used in) financing activities
|
155,158
|
|
|
(41,951
|
)
|
Net increase in cash and cash equivalents
|
120,223
|
|
|
120,261
|
|
Cash and cash equivalents at beginning of the period
|
94,302
|
|
|
131,212
|
|
Cash and cash equivalents at end of period
|
$
|
214,525
|
|
|
$
|
251,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
Cash paid for income taxes
|
$
|
81,000
|
|
|
$
|
55,000
|
|
Cash paid for interest (including convertible debt inducement)
|
$
|
8,676
|
|
|
$
|
5,498
|
|
Stock issued to settle debt
|
$
|
157,591
|
|
|
$
|
—
|
|
See accompanying notes.
PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments), except as discussed under Correction of Immaterial Error and Reclassification below, that management of PDL believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying Condensed Consolidated Financial Statements and related financial information should be read in conjunction with the audited Consolidated Financial Statements and the related notes thereto for the year ended
December 31, 2013
, included in our Annual Report on Form 10-K filed with the SEC. The Condensed Consolidated Balance Sheet at
December 31, 2013
, has been derived from the audited Consolidated Financial Statements at that date.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of PDL and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Our condensed consolidated financial statements are prepared in accordance with GAAP and the rules and regulations of the SEC.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Notes Receivable and Other Long-Term Receivables
We account for our notes receivable at amortized cost, net of unamortized origination fees, if any. Related fees and costs are recorded net of any amounts reimbursed. Interest is accreted or accrued to "Interest revenue" using the interest method. When and if supplemental royalties are received from certain of these notes and other long-term receivables, an adjustment to the estimated effective interest rate is affected prospectively.
Royalty Rights - At Fair Value
We have elected to account for our investments in royalty rights at fair value with changes in fair value presented in earnings. The fair value of the investments in royalty rights is determined by using a discounted cash flow analysis related to the expected future cash flows to be received. These assets are classified as Level 3 assets within the fair value hierarchy as our valuation estimates utilize significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products. Transaction related fees and costs are expensed as incurred.
Realized and unrealized gains and losses from investments in royalty rights are presented together on the statements of income as a component of revenue under the caption, “Royalty rights - change in fair value.”
Correction of Immaterial Error
As disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, PDL was engaged in ongoing discussions with the SEC staff after receiving a comment letter regarding the Company's consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The comment letter requested additional information about the Company’s accounting for the Depomed Royalty Agreement. The Company was asked to support its position and explain why the transaction was accounted for as the acquisition of intangible assets as opposed to that of financial assets. While significant judgment is required to account for this transaction, as either the acquisition of intangible assets or financial assets, we have concluded that it is most appropriate to account for the asset as a
Level 3 financial asset, which is a change to the previously reported accounting for this transaction. PDL has elected to measure this asset at fair value each reporting period. The change in the estimated fair value of this asset at each reporting period will be shown on a single caption, “Royalty rights - change in fair value” in our condensed consolidated statements of income. The purchase of this asset will be reported as an investing activity in our consolidated statements of cash flows. The revenue recognized each period related to this asset will be reported as an adjustment to net income in order to determine net cash provided by (used in) operating activities in our consolidated statements of cash flows. Actual cash received will be reported as an investing cash inflow in our consolidated statements of cash flows, separate from cash used in investing activities to purchase the asset in 2013. The Company reviewed the impact of this change in accounting on prior annual and interim periods in accordance with SAB no. 99,
Materiality
and SAB No. 108,
Considering the Effects of Prior year Misstatements when Quantifying Misstatements in Current Year Financial Statements
and determined that the changes were not material for the period from October 18, 2013 (acquisition date), through March 31, 2014, and did not represent a material impact to our consolidated financial statements in either our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2013, or our previously filed Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2013 (in thousands)
|
Amounts in 000's
|
|
As Filed
|
|
Reclassification
|
|
Correction of Error
|
|
As Corrected
|
|
% Error Change
|
Total Revenues
|
|
$
|
442,921
|
|
|
$
|
18,976
|
|
|
$
|
190
|
|
|
$
|
462,087
|
|
|
—
|
%
|
Operating Income
|
|
$
|
407,529
|
|
|
$
|
18,976
|
|
|
$
|
5,013
|
|
|
$
|
431,518
|
|
|
1.2
|
%
|
Pre-tax Income
|
|
$
|
401,876
|
|
|
$
|
—
|
|
|
$
|
5,013
|
|
|
$
|
406,889
|
|
|
1.2
|
%
|
Net Income
|
|
$
|
264,530
|
|
|
$
|
—
|
|
|
$
|
3,184
|
|
|
$
|
267,714
|
|
|
1.2
|
%
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.89
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
|
$
|
1.91
|
|
|
1.1
|
%
|
Diluted
|
|
$
|
1.66
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
|
$
|
1.68
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2014 (in thousands)
|
Amounts in 000's
|
|
As Filed
|
|
Reclassification
|
|
Correction of Error
1
|
|
As Corrected
|
|
% Error Change
|
Total Revenues
|
|
$
|
139,664
|
|
|
$
|
9,071
|
|
|
$
|
1,669
|
|
|
$
|
150,404
|
|
|
1.2
|
%
|
Operating Income
|
|
$
|
123,151
|
|
|
$
|
9,071
|
|
|
$
|
12,786
|
|
|
$
|
145,008
|
|
|
10.4
|
%
|
Pre-tax Income
|
|
$
|
115,604
|
|
|
$
|
—
|
|
|
$
|
12,786
|
|
|
$
|
128,390
|
|
|
11.1
|
%
|
Net Income
|
|
$
|
72,883
|
|
|
$
|
—
|
|
|
$
|
8,121
|
|
|
$
|
81,004
|
|
|
11.1
|
%
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
0.53
|
|
|
10.4
|
%
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
—
|
|
|
$
|
0.05
|
|
|
$
|
0.49
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
1
Includes cumulative impact of 2013 corrections
|
We evaluated the materiality of correcting the cumulative error in the period ended June 30, 2014. Based on such evaluation, we concluded that the correction is not material to this period. Accordingly, we corrected the cumulative error in our condensed consolidated statement of income for the quarter ended June 30, 2014 as follows: (i)
$1.7 million
increase in total revenues, (ii)
$12.8 million
increase pre-tax income, (iii)
$8.1 million
increase in net income. The impacts to our condensed consolidated balance sheet and statements of cash flows were not material.
We determined that a retrospective revision due to the correction of an error was not required. The prospective change is reflected in the current period as a component of “Royalty rights - change in fair value” in our condensed consolidated statements of income. Intangible assets that were presented in historical periods have been reclassified to "Royalty rights - at fair value" for all periods presented. Such reclassifications did not have an impact on our results of operations, cash flows or financial position.
Reclassifications
Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Interest income recognized from financial assets that were previously reported as a component of "Interest and other income, net" in the condensed consolidated statements of income has been reclassified to "Interest revenue" as a component of revenue in the condensed consolidated statements of income.
Customer Concentration
The percentage of total revenue recognized, which individually accounted for ten percent or more of our total revenues, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Licensee
|
|
Product Name
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Genentech
|
|
Avastin
®
|
|
24
|
%
|
|
31
|
%
|
|
27
|
%
|
|
33
|
%
|
|
|
Herceptin
®
|
|
24
|
%
|
|
32
|
%
|
|
25
|
%
|
|
32
|
%
|
|
|
Lucentis
®
|
|
10
|
%
|
|
20
|
%
|
|
11
|
%
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Biogen Idec
1
|
|
Tysabri
®
|
|
8
|
%
|
|
9
|
%
|
|
9
|
%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Depomed
|
|
Glumetza
®
|
|
16
|
%
|
|
0
|
%
|
|
13
|
%
|
|
0
|
%
|
______________________
1
In April 2013, Biogen Idec completed its purchase of Elan's interest in Tysabri. Prior to this our licensee for Tysabri was identified as Elan.
Foreign Currency Hedging
We enter into foreign currency hedges to manage exposures arising in the normal course of business and not for speculative purposes.
We hedge certain Euro-denominated currency exposures related to royalties associated with our licensees’ product sales with Euro forward contracts. In general, these contracts are intended to offset the underlying Euro market risk in our royalty revenues. These contracts currently extend through the fourth quarter of 2014. We designate foreign currency exchange contracts used to hedge royalty revenues based on underlying Euro-denominated licensee product sales as cash flow hedges.
At the inception of each hedging relationship and on a quarterly basis, we assess hedge effectiveness. The fair value of the Euro contracts is estimated using pricing models with readily observable inputs from actively quoted markets and is disclosed on a gross basis. The aggregate unrealized gain or loss, net of tax, on the effective component of the hedge is recorded in stockholders’ equity as accumulated other comprehensive income (loss). Gains or losses on cash flow hedges are recognized as an adjustment to royalty revenue in the same period that the hedged transaction impacts earnings as royalty revenue. Any gain or loss on the ineffective portion of our hedge contracts is reported in interests and other income, net in the period the ineffectiveness occurs.
Recent Accounting Pronouncements
In May 2014, the FASB issued new revenue recognition guidance which amended the existing accounting standards for revenue recognition. The new guidance establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently in the process of evaluating the impact of adoption of the new standard on its consolidated financial statements, but does not expect the impact to be material.
2. Net Income per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
Net Income per Basic and Diluted Share:
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
(in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income used to compute net income per basic share
|
|
$
|
92,055
|
|
|
$
|
93,742
|
|
|
$
|
164,938
|
|
|
$
|
147,213
|
|
Add back interest expense for convertible notes, net of estimated tax of approximately $0 and $3 for the three months ended June 30, 2014 and 2013, respectively, and $0 and $7 for the six months ended June 30, 2014 and 2013, respectively.
|
|
—
|
|
|
6
|
|
|
—
|
|
|
13
|
|
Net income used to compute net income per diluted share
|
|
$
|
92,055
|
|
|
$
|
93,748
|
|
|
$
|
164,938
|
|
|
$
|
147,226
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute net income per basic share
|
|
160,256
|
|
|
139,825
|
|
|
155,752
|
|
|
139,821
|
|
Restricted stock outstanding
|
|
115
|
|
|
75
|
|
|
90
|
|
|
71
|
|
Effect of dilutive stock options
|
|
22
|
|
|
19
|
|
|
21
|
|
|
19
|
|
Assumed conversion of February 2018 Notes
|
|
1,872
|
|
|
—
|
|
|
1,484
|
|
|
—
|
|
Assumed conversion of Series 2012 Notes
|
|
4,487
|
|
|
8,304
|
|
|
7,570
|
|
|
8,693
|
|
Assumed conversion of May 2015 Notes
|
|
10,476
|
|
|
3,825
|
|
|
10,894
|
|
|
4,004
|
|
Assumed conversion of February 2015 Notes
|
|
—
|
|
|
176
|
|
|
—
|
|
|
176
|
|
Weighted-average shares used to compute net income per diluted share
|
|
177,228
|
|
|
152,224
|
|
|
175,811
|
|
|
152,784
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.57
|
|
|
$
|
0.67
|
|
|
$
|
1.06
|
|
|
$
|
1.05
|
|
Net income per share - diluted
|
|
$
|
0.52
|
|
|
$
|
0.62
|
|
|
$
|
0.94
|
|
|
$
|
0.96
|
|
We compute diluted net income per share using the sum of the weighted-average number of common and common equivalents shares outstanding. Common equivalent shares used in the computation of diluted net income per share include shares that may be issued under our stock options and restricted stock awards, our February 2018 Notes, our Series 2012 Notes and our May 2015 Notes on a weighted average basis for the period that the notes were outstanding, including the effect of adding back interest expense and the underlying shares using the if converted method. In the first quarter of 2012,
$179.0 million
aggregate principal of our February 2015 Notes was exchanged for our Series 2012 Notes, in the third quarter of 2013,
$1.0 million
aggregate principal of our February 2015 Notes was exchanged for our Series 2012 Notes, and the February 2015 Notes were retired, and in the first quarter of 2014,
$131.7 million
aggregate principal of our Series 2012 Notes was retired in a privately negotiated exchange and purchase agreements.
In May 2011, we issued our May 2015 Notes, in January and February 2012, we issued our Series 2012 Notes, and in February 2014, we issued our February 2018 Notes. The February 2018 Notes, Series 2012 Notes and May 2015 Notes are net share settled, with the principal amount settled in cash and the excess settled in our common stock. The weighted average share adjustments related to our February 2018 Notes, Series 2012 Notes and May 2015 Notes, shown in the table above, include the shares issuable in respect of such excess.
May 2015 Notes Purchase Call Option and Warrant Potential Dilution
We excluded from our calculations of diluted net income per share
21.8 million
and
20.4 million
shares for the
three months ended June 30, 2014
and
2013
, respectively, and
21.8 million
and
20.4 million
shares for the
six months ended June 30, 2014
, and 2013, for warrants issued in 2011, because conversion of the underlying May 2015 Notes is not assumed. These securities could be dilutive in future periods. Our purchased call options, issued in 2011, will always be anti-dilutive and therefore
25.7 million
and
24.0 million
shares were excluded from our calculations of net income per diluted share for the
three months ended June 30, 2014
and
2013
, respectively, and
25.7 million
and
24.0 million
shares were excluded from our calculation of diluted net income per share for the
six months ended June 30, 2014
, and 2013, respectively, because they have no effect on diluted net income per share. For information related to the conversion rates on our convertible debt, see Note 9.
February 2018 Notes Purchase Call Option and Warrant Potential Dilution
We excluded from our calculation of net income per diluted share
29.0 million
shares for the
three months ended June 30, 2014
,
29.0 million
shares for the
six months ended June 30, 2014
, for warrants issued in February 2014, because the exercise price of the warrants exceeded the VWAP of our common stock and conversion of the underlying February 2018 Notes is not assumed, no stock would be issuable upon conversion. These securities could be dilutive in future periods. Our purchased call options, issued in February 2014, will always be anti-dilutive and therefore
32.7 million
shares were excluded from our calculation of net income per diluted share for the
three months ended June 30, 2014
, and
32.7 million
shares were excluded from our calculation of net income per diluted share for the
six months ended June 30, 2014
, because they have no effect on diluted net income per share. For information related to the conversion rates on our convertible debt, see Note 9.
Anti-Dilutive Effect of Stock Options and Restricted Stock Awards
For the
three and six
months ended
June 30, 2014
, we excluded approximately
24,000
and
69,000
shares underlying outstanding stock options, respectively, calculated on a weighted average basis, from our net income per diluted share calculations because their effect was anti-dilutive.
For the three months ended
June 30, 2013
, we excluded approximately
139,000
and
28,000
shares underlying outstanding stock options and restricted stock awards, respectively, calculated on a weighted average basis, from our net income per diluted share calculations because their effect was anti-dilutive. For the six months ended
June 30, 2013
, we excluded approximately
139,000
and
8,000
shares underlying outstanding stock options and restricted stock awards, respectively, calculated on a weighted average basis, from our net income per diluted share calculations because their effect was anti-dilutive.
3. Fair Value Measurements
The fair value of our financial instruments are estimates of the amounts that would be received if we were to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date or exit price. The assets and liabilities are categorized and disclosed in one of the following three categories:
Level 1 – based on quoted market prices in active markets for identical assets and liabilities;
Level 2 – based on quoted market prices for similar assets and liabilities, using observable market based inputs or unobservable market based inputs corroborated by market data; and
Level 3 – based on unobservable inputs using management’s best estimate and assumptions when inputs are unavailable.
The following tables present the fair value of our financial instruments measured at fair value on a recurring basis by level within the valuation hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
155,107
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
155,107
|
|
|
$
|
85,970
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85,970
|
|
Corporate securities
|
|
—
|
|
|
3,243
|
|
|
—
|
|
|
3,243
|
|
|
—
|
|
|
5,238
|
|
|
—
|
|
|
5,238
|
|
Royalty rights - at fair value
|
|
—
|
|
|
—
|
|
|
247,116
|
|
|
247,116
|
|
|
—
|
|
|
—
|
|
|
235,677
|
|
|
235,677
|
|
Total
|
|
$
|
155,107
|
|
|
$
|
3,243
|
|
|
$
|
247,116
|
|
|
$
|
405,466
|
|
|
$
|
85,970
|
|
|
$
|
5,238
|
|
|
$
|
235,677
|
|
|
$
|
326,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency hedge contracts
|
|
$
|
—
|
|
|
$
|
4,199
|
|
|
$
|
—
|
|
|
$
|
4,199
|
|
|
$
|
—
|
|
|
$
|
8,871
|
|
|
$
|
—
|
|
|
$
|
8,871
|
|
There have been
no
transfers between levels during the
three months ended June 30, 2014
, and December 31,
2013
. The Company recognizes transfers between levels on the date of the event or change in circumstances that caused the transfer.
Corporate Securities
Corporate securities consist primarily of U.S. corporate equity holdings. The fair value of corporate securities is estimated using recently executed transactions or market quoted prices, where observable. Independent pricing sources are also used for valuation.
Royalty Rights - At Fair Value
Depomed Royalty Agreement
On October 18, 2013, PDL entered into the Depomed Royalty Agreement, whereby the Company acquired the rights to receive royalties and milestones payable on sales of Type 2 diabetes products licensed by Depomed in exchange for a
$240.5 million
cash payment. Total arrangement consideration was
$241.3 million
, which was comprised of the
$240.5 million
cash payment to Depomed and
$0.8 million
in transaction costs.
The rights acquired include Depomed’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck with respect to sales of Janumet® XR (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica with respect to potential future development milestones and sales of its investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Depomed’s license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences and Valeant Pharmaceuticals for sales of extended-release metformin in Korea and Canada, respectively.
Under the terms of the Royalty Purchase and Sale Agreement, the Company will receive all royalty and milestone payments due under license agreements between Depomed and its licensees until the Company has received payments equal to two times the cash payment it made to Depomed, after which all net payments received by Depomed will be shared evenly between the Company and Depomed.
The Royalty Purchase and Sale Agreement terminates on the third anniversary following the date upon which the later of the following occurs: (a) October 25, 2021, or (b) at such time as no royalty payments remain payable under any license agreement and each of the license agreements has expired by its terms.
As of June 30, 2014, and December 31, 2013, the Company determined that its royalty purchase interest in Depo DR Sub represented a variable interest in a variable interest entity since the equity in Depo DR Sub was not sufficient to finance its operations without additional financing. However, the Company does not have the power to direct the activities of Depo DR Sub that most significantly impact Depo DR Sub's economic performance and is not the primary beneficiary of Depo DR Sub; therefore, Depo DR Sub is not subject to consolidation by the Company.
The asset acquired represents a single unit of accounting. The fair value of the asset acquired was determined by using a discounted cash flow analysis related to the expected future cash flows to be generated by each licensed product. This asset is classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future commercialization for products not yet approved by the FDA or other regulatory agencies. The discounted cash flow was based upon expected royalties from sales of licensed products over a nine year period. The discount rates utilized ranged from approximately
21%
to
25%
. Significant judgment is required in selecting appropriate discount rates.
Should these discount rates increase or decrease by 5%, the fair value of the asset could decrease by $22.3 million or increase by $28.2 million, respectively.
A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows. The fair value of the asset is subject to variation should cash flows vary significantly from our estimates. An evaluation of those estimates, discount rates utilized and general market conditions effecting fair market value will be performed in each reporting period.
As of June 30, 2014, and December 31, 2013, the carrying value of the asset acquired and reported in our consolidated balance sheets was approximately
$231.6 million
and
$235.7 million
, respectively. As of June 30, 2014, the maximum loss exposure was
$231.6 million
.
VB Royalty Agreement
On June 26, 2014, PDL entered into the VB Royalty Agreement, whereby VB conveyed to the Company the right to receive royalties payable on sales of a PMA-approved spinal implant in exchange for a
$15.5 million
cash payment, less fees.
The royalty acquired includes royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company will receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company has received payments equal to two and three tenths times the cash payment made to VB, after which all rights to receive royalties will be returned to VB. VB may repurchase the royalty right at any time on or before June 26, 2018, for a specified amount. The acting chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement where negotiated separately.
The fair value of the royalty right at June 30, 2014, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is classified as a Level 3 asset, as our valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the licensed product. The discounted cash flow was based upon expected royalties from sales of licensed product over a nine year period. The discount rate utilized was approximately
17.5%
. Significant judgment is required in selecting the appropriate discount rate.
Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $1.4 million or increase by $1.7 million, respectively.
A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows. The fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. An evaluation of those estimates, discount rates utilized and general market conditions effecting fair market value will be performed in each reporting period.
As of June 30, 2014, the carrying value of the asset acquired as reported in our consolidated balance sheets was
$15.5 million
. As of June 30, 2014, the maximum loss exposure was
$15.5 million
.
The following tables summarize the changes in Level 3 assets and the gains and losses included in earnings for the six months ending June 30, 2014:
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
(in thousands)
|
|
Royalty Rights - At Fair Value
|
Beginning Balance at December 31, 2013
|
|
—
|
|
|
|
|
|
|
|
Transfer into Level 3
|
|
235,677
|
|
|
Total change in fair value for the period
|
|
|
|
|
Included in earnings
|
|
(4,061
|
)
|
|
Purchases, issues, sales, and settlements
|
|
|
|
|
Purchases
|
|
15,500
|
|
|
|
|
|
|
Ending Balance at June 30, 2014
|
|
$
|
247,116
|
|
The correction of the immaterial error as described in Note 1 resulted in accounting for the Depomed Royalty Agreement as a Level 3 financial asset. That correction has been identified above as a transfer into Level 3.
Gains and losses included in earnings for each period are presented in "Royalty rights - change in fair value" as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(in thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
Total change in fair value for the period included in earnings for assets held at the end of the reporting period
|
|
$
|
(4,061
|
)
|
|
$
|
—
|
|
|
$
|
(4,061
|
)
|
|
$
|
—
|
|
Foreign Currency Hedge Contracts
The fair value of the foreign currency hedge contracts is estimated based on pricing models using readily observable inputs from actively quoted markets and are disclosed on a gross basis.
The following tables present the fair value of assets and liabilities not subject to fair value recognition by level within the valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
Carrying Value
|
|
Fair Value
Level 2
|
|
Fair Value
Level 3
|
|
Carrying Value
|
|
Fair Value
Level 2
|
|
Fair Value
Level 3
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellstat Diagnostics note receivable
|
|
$
|
50,191
|
|
|
$
|
—
|
|
|
$
|
50,191
|
|
|
$
|
47,694
|
|
|
$
|
—
|
|
|
$
|
46,042
|
|
Hyperion
|
|
1,200
|
|
|
—
|
|
|
1,200
|
|
|
1,194
|
|
|
—
|
|
|
1,195
|
|
AxoGen note receivable and embedded derivative
|
|
28,942
|
|
|
—
|
|
|
27,160
|
|
|
26,544
|
|
|
—
|
|
|
25,785
|
|
Avinger note receivable
|
|
20,422
|
|
|
—
|
|
|
19,336
|
|
|
20,250
|
|
|
—
|
|
|
19,061
|
|
LENSAR note receivable
|
|
39,591
|
|
|
—
|
|
|
40,842
|
|
|
39,572
|
|
|
—
|
|
|
39,572
|
|
Durata note receivable
|
|
40,000
|
|
|
—
|
|
|
39,402
|
|
|
24,995
|
|
|
—
|
|
|
24,995
|
|
Direct Flow Medical note receivable
|
|
35,049
|
|
|
—
|
|
|
34,723
|
|
|
34,799
|
|
|
—
|
|
|
34,799
|
|
Paradigm Spine note receivable
|
|
49,517
|
|
|
—
|
|
|
51,165
|
|
|
—
|
|
|
—
|
|
|
—
|
|
kaléo note receivable
|
|
155,407
|
|
|
—
|
|
|
155,407
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
420,319
|
|
|
$
|
—
|
|
|
$
|
419,426
|
|
|
$
|
195,048
|
|
|
$
|
—
|
|
|
$
|
191,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2012 Notes
|
|
$
|
47,160
|
|
|
$
|
88,523
|
|
|
$
|
—
|
|
|
$
|
172,630
|
|
|
$
|
277,650
|
|
|
$
|
—
|
|
May 2015 Notes
|
|
150,797
|
|
|
248,889
|
|
|
—
|
|
|
148,253
|
|
|
212,304
|
|
|
—
|
|
February 2018 Notes
|
|
272,824
|
|
|
341,955
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Term loan
|
|
37,364
|
|
|
37,500
|
|
|
—
|
|
|
74,397
|
|
|
75,000
|
|
|
—
|
|
Total
|
|
$
|
508,145
|
|
|
$
|
716,867
|
|
|
$
|
—
|
|
|
$
|
395,280
|
|
|
$
|
564,954
|
|
|
$
|
—
|
|
As of
June 30, 2014
, the estimated fair value of our Paradigm Spine note receivable and kaléo note receivable, as of
June 30, 2014
and
December 31, 2013
, the estimated fair values of our Wellstat Diagnostics note receivable, Hyperion note receivable, AxoGen note receivable and derivative, Avinger note receivable, LENSAR note receivable, Durata note receivable and Direct Flow Medical note receivable, were determined using one or more discounted cash flow models, incorporating expected payments and the interest rate extended on the notes receivable with fixed interest rates and incorporating expected payments for notes receivable with a variable rate of return. In some instances the carrying values of certain notes receivable exceed their estimated fair market values. This is generally the result of discount rates used when performing a discounted cash flow for fair value valuation purposes. In all cases, the undiscounted expected future cash flows exceed the related carrying value.
When deemed necessary we engage a third party valuation expert to assist in evaluating our investments and the related inputs needed for us to estimate the fair value of certain investments. We determined our notes receivable assets are Level 3 assets as our valuations utilized significant unobservable inputs, including estimates of future revenues, discount rates, expectations about settlement, terminal values and required yield. To provide support for the estimated fair value measurements, we considered forward looking performance related to the investment and current measures associated with high yield indices, and reviewed the terms and yields of notes placed by specialty finance and venture firms both across industries and in similar sectors.
The carrying value and estimated fair value of the AxoGen note include the value of a change of control embedded derivative valued at
$1.2 million
and
$1.1 million
at
June 30, 2014
, and
December 31, 2013
, respectively. We utilized discounted cash flows and probability analysis to estimate the fair value of the embedded derivative.
The Wellstat Diagnostics note is collateralized by all assets and equity interest in Wellstat Diagnostics. The estimated fair value of the collateral was determined by using a discounted cash flow analysis related to the underlying technology included in the collateral. On
June 30, 2014
, the discounted cash flow was based upon expected income from estimated sales over a period of
15 years
. The terminal value was estimated using selected market multiples based on sales and EBITDA. On
December 31, 2013
, the estimated fair value of Wellstat Diagnostics Note Receivable and Credit Agreement was determined by using a discounted cash flow that was based upon expected income from estimated sales through December 31, 2016.
On
June 30, 2014
, the carrying value of the Avinger note exceeds its fair value. This is the result of discount rates used when performing a discounted cash flow for fair value valuation purposes. We determined this note to be a Level 3 asset, as our valuation utilized significant unobservable inputs, including a discount rate of
22.5%
, estimates of Avinger's future revenues, expectations about settlement and required yield. To provide support for the fair value measurement, we considered forward looking performance related to Avinger, current measures associated with high yield and Standard & Poor's Leveraged Commentary & Data indices, and reviewed the terms and yields of notes placed by specialty finance and venture firms both across industries and in a similar sector.
The fair values of our convertible notes were determined using quoted market pricing or dealer quotes.
4. Cash Equivalents and Investments
As of
June 30, 2014
, and
December 31, 2013
, we had invested our excess cash balances primarily in money market funds, and a corporate security. Our securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss) in stockholders’ equity, net of estimated taxes. See Note 3 for fair value measurement information. The cost of securities sold is based on the specific identification method. To date, we have not experienced credit losses on investments in these instruments and we do not require collateral for our investment activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Cash and Available-For-Sale Securities
|
|
Adjusted Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Estimated Fair Value
|
|
Cash and Cash Equivalents
|
|
Short-Term Investments
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
59,418
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59,418
|
|
|
$
|
59,418
|
|
|
$
|
—
|
|
Money market funds
|
|
155,107
|
|
|
—
|
|
|
—
|
|
|
155,107
|
|
|
155,107
|
|
|
—
|
|
Corporate security
|
|
3,500
|
|
|
—
|
|
|
(257
|
)
|
|
3,243
|
|
|
—
|
|
|
3,243
|
|
Total
|
|
$
|
218,025
|
|
|
$
|
—
|
|
|
$
|
(257
|
)
|
|
$
|
217,768
|
|
|
$
|
214,525
|
|
|
$
|
3,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,332
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,332
|
|
|
$
|
8,332
|
|
|
$
|
—
|
|
Money market funds
|
|
85,970
|
|
|
—
|
|
|
—
|
|
|
85,970
|
|
|
85,970
|
|
|
—
|
|
Corporate security
|
|
3,500
|
|
|
1,738
|
|
|
—
|
|
|
5,238
|
|
|
—
|
|
|
5,238
|
|
Total
|
|
$
|
97,802
|
|
|
$
|
1,738
|
|
|
$
|
—
|
|
|
$
|
99,540
|
|
|
$
|
94,302
|
|
|
$
|
5,238
|
|
No
gains or losses on sales of available-for-sale securities were recognized for the
three and six
months ended
June 30, 2014
and
2013
.
The unrealized gain (loss) on investments included in other comprehensive income (loss), net of estimated taxes, was approximately
($167,000)
and
$1,129,000
as of June 30, 2014, and December 31, 2013, respectively. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of these securities. Based on our review of these securities, we believe we had no other-than-temporary impairments on these securities as of June 30, 2014, and December 31, 2013.
5. Foreign Currency Hedging
We designate the foreign currency exchange contracts used to hedge our royalty revenues based on underlying Euro-denominated sales as cash flow hedges. Euro forward contracts are presented on a net basis on our Condensed Consolidated Balance Sheets as we have entered into a netting arrangement with the counterparty. As of
June 30, 2014
, and
December 31, 2013
, all outstanding Euro forward contracts were classified as cash flow hedges.
In January 2012, we modified our existing Euro forward and option contracts related to our licensees’ sales through December 2012 into Euro forward contracts with more favorable rates. Additionally, we entered into a series of Euro forward contracts covering the quarters in which our licensees’ sales occur through December 2014.
The notional amounts, Euro exchange rates and fair values of our Euro forward contracts designated as cash flow hedges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Forward Contracts
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
|
|
|
|
(In thousands)
|
|
(In thousands)
|
Currency
|
|
Settlement Price
($ per Euro)
|
|
Type
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Euro
|
|
1.240
|
|
Sell Euro
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,850
|
|
|
$
|
(1,207
|
)
|
Euro
|
|
1.270
|
|
Sell Euro
|
|
27,940
|
|
|
(2,126
|
)
|
|
44,450
|
|
|
(3,760
|
)
|
Euro
|
|
1.281
|
|
Sell Euro
|
|
30,732
|
|
|
(2,073
|
)
|
|
36,814
|
|
|
(2,785
|
)
|
Euro
|
|
1.300
|
|
Sell Euro
|
|
—
|
|
|
—
|
|
|
19,500
|
|
|
(1,119
|
)
|
Total
|
|
|
|
|
|
$
|
58,672
|
|
|
$
|
(4,199
|
)
|
|
$
|
111,614
|
|
|
$
|
(8,871
|
)
|
The location and fair values of our Euro contracts in our Condensed Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedge
|
|
Location
|
|
June 30,
2014
|
|
December 31,
2013
|
(In thousands)
|
|
|
|
|
|
|
Euro contracts
|
|
Accrued liabilities
|
|
$
|
4,199
|
|
|
$
|
7,355
|
|
Euro contracts
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
1,516
|
|
The effect of our derivative instruments in our Condensed Consolidated Statements of Income and our Condensed Consolidated Statements of Comprehensive Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net gain (loss) recognized in OCI, net of tax
(1)
|
|
$
|
264
|
|
|
$
|
(1,265
|
)
|
|
$
|
331
|
|
|
$
|
2,303
|
|
Gain (loss) reclassified from accumulated OCI into royalty revenue, net of tax
(2)
|
|
$
|
(2,027
|
)
|
|
$
|
268
|
|
|
$
|
(2,755
|
)
|
|
$
|
(979
|
)
|
Net gain (loss) recognized in interest and other income, net -- cash flow hedges
(3)
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
5
|
|
_______________________________
(1)
Net change in the fair value of the effective portion of cash flow hedges classified in OCI.
(2)
Effective portion classified as royalty revenue.
(3)
Ineffectiveness from excess hedge was approximately
($1)
and
($2)
for the
three months ended June 30, 2014
and
2013
, respectively, and
$(3)
and
($5)
for the six months ended June 30, 2014, and 2013, respectively.
6. Notes Receivable and Other Long-term Receivables
Notes receivable and other long-term receivables included the following significant agreements:
Wellstat Diagnostics Note Receivable and Credit Agreement
In March 2012, the Company executed a
$7.5 million
two
-year senior secured note receivable with the holders of the equity interests in Wellstat Diagnostics. In addition to bearing interest at
10%
per annum, the note gave PDL certain rights to negotiate for certain future financing transactions. In August 2012, PDL and Wellstat Diagnostics amended the note receivable, providing a senior secured note receivable of
$10.0 million
, bearing interest at
12%
per annum, to replace the original
$7.5 million
note. This
$10.0 million
note was repaid on November 2, 2012, using the proceeds of the
$40.0 million
credit facility entered into with the Company on the same date.
On November 2, 2012, the Company and Wellstat Diagnostics entered into a
$40.0 million
credit agreement pursuant to which the Company is to accrue quarterly interest payments at the rate of
5%
per annum (payable in cash or in kind). In addition, PDL will receive quarterly royalty payments based on a low double digit royalty rate of Wellstat Diagnostics' net revenues, generated by the sale, distribution or other use of Wellstat Diagnostics' products, if any, commencing upon the commercialization of its products.
In January 2013, the Company was informed that, as of December 31, 2012, Wellstat Diagnostics had used funds contrary to the terms of the credit agreement and breached Sections 2.1.2 and 7 of the credit agreement. PDL sent Wellstat Diagnostics a notice of default on January 22, 2013, and accelerated the amounts owed under the credit agreement. In connection with the notice of default, PDL exercised one of its available remedies and transferred approximately
$8.1 million
of available cash from a bank account of Wellstat Diagnostics to PDL and applied the funds to amounts due under the credit agreement. On February 28, 2013, the parties entered into a forbearance agreement whereby PDL agreed to refrain from exercising additional remedies for
120 days
while Wellstat Diagnostics raised funds to capitalize the business and the parties attempted to negotiate a revised credit agreement. PDL agreed to provide up to
$7.9 million
to Wellstat Diagnostics to fund the business for the
120
-day forbearance period under the terms of the forbearance agreement. Following the conclusion of the forbearance period that ended on June 28, 2013, the Company agreed to forbear its exercise of remedies for additional periods of time to allow the owners and affiliates of Wellstat Diagnostics to complete a pending financing transaction. During such forbearance period, the Company provided approximately
$1.3 million
to Wellstat Diagnostics to fund ongoing operations of the business. During the year ended December 31, 2013, approximately
$8.7 million
was advanced pursuant to the forbearance agreement, and no further advances have been provided by the Company to Wellstat Diagnostics during the
six months ended
June 30, 2014
.
On August 15, 2013, the owners and affiliates of Wellstat Diagnostics completed a financing transaction to fulfill its obligations under the forbearance agreement. On August 15, 2013, the Company entered into an amended and restated credit agreement with Wellstat Diagnostics. The Company determined that the new agreement should be accounted for as a modification of the existing agreement.
Except as otherwise described here, the material terms of the amended and restated credit agreement are substantially the same as those of the original credit agreement, including quarterly interest payments at the rate of
5%
per annum (payable in cash or in kind). In addition, PDL will continue to receive quarterly royalty payments based on a low double digit royalty rate of Wellstat Diagnostics' net revenues. However, pursuant to the amended and restated credit agreement: (i) the principal amount was reset to approximately
$44.1 million
which was comprised of approximately
$33.7 million
original loan principal and interest,
$1.3 million
term loan principal and interest and
$9.1 million
forbearance principal and interest; (ii) the specified internal rates of return increased; (iii) the default interest rate was increased; (iv) Wellstat Diagnostics' obligation to provide certain financial information increased in frequency to monthly; (v) internal financial controls were strengthened by requiring Wellstat Diagnostics to maintain an independent, third-party financial professional with control over fund disbursements; (vi) the Company waived the existing events of default; and (vii) the owners and affiliates of Wellstat Diagnostics are required to contribute additional capital to Wellstat Diagnostics upon the sale of an affiliate entity. The amended and restated credit agreement continues to have an ultimate maturity date of December 31, 2021 (but may mature earlier upon certain specified events).
When the principal amount was reset, a
$2.5 million
reduction of the carrying value was recorded as a financing cost as a component of interest and other income, net. The new carrying value is lower as a function of the variable nature of the internal rate of return to be realized by the Company based on when the note is repaid. The internal rate of return calculation, although increased, was reset when the credit agreement was amended and restated.
In June of 2014, the Company received information from Wellstat Diagnostics that showed that it was generally unable to pay its debts as they became due. This constitutes an Event of Default under the amended and restated credit agreement. Wellstat Diagnostics entered into a transaction involving another lender, pursuant to which Wellstat Diagnostics obtained additional short term funding for its operations. At the same time, the Company entered into the First Amendment to Amended and Restated Credit Agreement with Wellstat Diagnostics. The material terms of the amendment include the following: (1) Wellstat Diagnostics acknowledged that an Event of Default had occurred, (2) the Company agreed to forbear from immediately enforcing its rights for up to sixty (60) days, so long as the other lender provided agreed levels of interim funding to Wellstat Diagnostics; and (3) the Company obtained specified additional information rights with regard to Wellstat Diagnostics’ financial matters and investment banking activities.
On August 5, 2014, the Company received notice that the short term funding being provided pursuant to the agreement with the other lender entered into during June 2014, was being terminated. Wellstat Diagnostics remained in default because it was still unable to pay its debts as they became due. Accordingly, the Company delivered a notice of default to Wellstat Diagnostics, due to, inter alia, its on-going failure to pay its debts as they become due and Wellstat Diagnostics’ failure to comply with certain covenants included in the First Amendment to Amended and Restated Credit Agreement by the deadlines to which the parties had agreed (the Borrower Notice). The Borrower Notice accelerates all obligations under the amended and restated credit agreement and demands immediate payment in full in an amount equal to
$53,939,820
, (which amount, in accordance with the terms of the amended and restated credit agreement, includes an amount that, together with interest and royalty payments already made to the Company, would generate a specified internal rate of return to the Company), plus accruing fees, costs and interest, and demands that Wellstat Diagnostics protect and preserve all collateral securing its obligations. On August 7, 2014, the Company delivered a notice to each of the guarantors of Wellstat Diagnostics’ obligations to the Company under the credit agreement (the Guarantor Notice). The Guarantor Notice includes a demand that the guarantors remit payment to the Company in the amount of the outstanding obligations. The guarantors include certain affiliates and related companies of Wellstat Diagnostics, as well as Wellstat Diagnostics’ shareholders. The Company is evaluating the remedies available to it at this time.
The amended and restated credit agreement is secured by a pledge of all of the assets of Wellstat Diagnostics, a pledge of all of Wellstat Diagnostics’ equity interests by the holders thereof, and a second lien on the assets of the affiliates of Wellstat Diagnostics.
At
June 30, 2014
, and December 31, 2013, the carrying value of the note was included in non-current assets.
As of
June 30, 2014
, the Company determined that its interest in Wellstat Diagnostics represented a variable interest in a Variable Interest Entity since Wellstat Diagnostics' equity was not sufficient to finance its operations without amounts advanced to it under the Company's note and forbearance agreement. However, the Company does not have the power to direct the activities of Wellstat Diagnostics that most significantly impacts Wellstat Diagnostic's economic performance and is not the primary beneficiary of Wellstat Diagnostics; therefore, Wellstat Diagnostics is not subject to consolidation.
As of
June 30, 2014
, the carrying value of all amounts advanced to Wellstat Diagnostics including accrued interest through March 31, 2014, was
$50.2 million
, which was recorded in notes receivable. As of
June 30, 2014
, the maximum loss exposure was
$50.2 million
. As a result of the event of default, we ceased to accrued interest for the current period presented.
We believe that Wellstat Diagnostics does not currently have sufficient capital to execute its business plan over the long term. Wellstat Diagnostics recently raised
$2.5 million
and has informed the Company that Wellstat Diagnostics is continuing to consider other sources of financing and strategic alternatives.
The estimated fair value of the collateral is approximately
$50.2 million
. The estimated fair value of the collateral was determined by using a discounted cash flow analysis related to the underlying technology included in the collateral. The discounted cash flow was based upon expected income from sales of planned products over a period of
15 years
. The terminal value was estimated using selected market multiples based on sales and EBITDA.
Hyperion Agreement
On January 27, 2012, PDL and Hyperion entered into an agreement whereby Hyperion sold to PDL the royalty streams due from SDK related to a certain patent license agreement between Hyperion and SDK dated December 31, 2008. The agreement assigned the patent license agreement royalty stream accruing from January 1, 2012 through December 31, 2013 to PDL in exchange for the lump sum payment to Hyperion of
$2.3 million
. In exchange for the lump sum payment, PDL was to receive
two
equal payments of
$1.2 million
on both March 5, 2013 and March 5, 2014. The first payment of
$1.2 million
was paid on March 5, 2013. The second and final payment of
$1.2 million
was due on March 5, 2014. Hyperion has not made the payment due on March 5, 2014. The inability to make this payment constitutes a breach of the purchase agreement. The Company
completed an impairment analysis as of June 30, 2014. The estimated fair value of the collateral was determined to be in excess of that of the carrying value. Hyperion is considering other sources of financing and strategic alternatives, including selling the company. Depending on the outcome of its efforts and PDL's assessment of Hyperion's financial viability, we may recognize an impairment in a future period.
Merus Labs Note Receivable and Credit Agreement
In July 2012, PDL loaned
$35.0 million
to Merus Labs in connection with its acquisition of a commercial-stage pharmaceutical product and related assets. In addition, PDL agreed to provide a
$20.0 million
letter of credit on behalf of Merus Labs for the seller of the assets to draw upon to satisfy the remaining
$20.0 million
purchase price obligation. The seller made this draw on the letter of credit in July 2013 and an additional loan to Merus Labs for
$20.0 million
was recorded for an aggregate of
$55.0 million
in total borrowings.
Outstanding borrowings under the July 2012 loan bore interest at the rate of
13.5%
per annum and outstanding borrowings as a result of the draw on the letter of credit bore interest at the rate of
14.0%
per annum. Merus Labs was required to make four periodic principal payments in respect of the July 2012 loan, with repayment of the remaining principal balance of all loans due on March 31, 2015. The borrowings were subject to mandatory prepayments upon certain asset dispositions or debt issuances as set forth in the credit agreement. Merus Labs made the first of these payments in December 2012 in the amount of
$5.0 million
, and made the second payment in June 2013 in the amount of
$7.5 million
.
In September 2013, Merus Labs prepaid in full its obligations under the credit agreement, including accrued interest through the payment date and a prepayment fee of
1%
of the aggregate principal amount outstanding at the time of repayment. There was
no
outstanding balance owed as of
June 30, 2014
.
AxoGen Note Receivable and AxoGen Royalty Agreement
In October 2012, PDL entered into the AxoGen Royalty Agreement with AxoGen pursuant to which the Company will receive specified royalties on AxoGen’s net revenues (as defined in the AxoGen Royalty Agreement) generated by the sale, distribution or other use of AxoGen’s products. The AxoGen Royalty Agreement has an
eight
year term and provides PDL with royalties of
9.95%
based on AxoGen's net revenues, subject to agreed-upon guaranteed quarterly minimum payments of approximately
$1.3
to
$2.5 million
beginning in the fourth quarter of 2014, and the right to require AxoGen to repurchase the AxoGen Royalty Agreement at the end of the fourth year. AxoGen has been granted certain rights to call the contract in years five through
eight
. The total consideration PDL paid to AxoGen for the royalty rights was
$20.8 million
, including an interim funding of
$1.8 million
in August 2012. AxoGen was required to use a portion of the proceeds from the AxoGen Royalty Agreement to pay the outstanding balance under its existing credit facility. AxoGen plans to use the remainder of the proceeds to support the business plan for its products. The royalty rights are secured by the cash and accounts receivable of AxoGen.
Under the AxoGen Royalty Agreement, beginning on October 1, 2016, or in the event of the occurrence of a material adverse event, AxoGen's bankruptcy or material breach of the AxoGen Royalty Agreement, the Company may require AxoGen to repurchase the royalty rights at a price that, together with payments already made by AxoGen, would generate a specified internal rate of return to the Company. The Company has concluded that the repurchase option is an embedded derivative which should be bifurcated and separately accounted for at fair value.
In the event of a change of control, AxoGen must repurchase the assigned interests from the Company for a repurchase price equal to an amount that, together with payments already made by AxoGen, would generate a
32.5%
internal rate of return to the Company. The Company has concluded that the change of control provision is an embedded derivative that should be bifurcated and separately recorded at its estimated fair value. The estimated fair value of the change of control provision was approximately
$1.2 million
and
$1.1 million
as of
June 30, 2014
, and
December 31, 2013
, respectively. The estimated fair value of this embedded derivative is included in the carrying value of the AxoGen note receivable. The Company recognized gains of approximately
$0.1 million
and
$0.4 million
related to the change in the estimated fair value of embedded derivative during the three month periods ended
June 30, 2014
and 2013, respectively. The Company recognized gains of approximately
$0.1 million
and
$0.4 million
related to the change in the estimated fair value of embedded derivative during the six month periods ended
June 30, 2014
and 2013, respectively.
At any time after September 30, 2016, AxoGen, at its option, can repurchase the assigned interests under the AxoGen Royalty Agreement for a price applicable in a change of control.
During the term of the AxoGen Royalty Agreement, the Company is entitled to designate an individual to be a member of AxoGen's board of directors. The Company has exercised this right and on October 5, 2012, upon the close of the transaction, the Company's President and Chief Executive Officer was elected to AxoGen's board of directors.
On August 14, 2013, PDL purchased
1,166,666
shares of AXGN at
$3.00
per share, totaling
$3.5 million
. The shares are classified as available for sale and recorded as short term investments on the balance sheet. As of
June 30, 2014
, the shares were valued at
$3.2 million
, which resulted in an unrealized loss of
$0.3 million
and is recorded in other comprehensive loss.
Avinger Note Receivable and Royalty Agreement
On April 18, 2013, PDL entered into a credit agreement with Avinger, under which we made available to Avinger up to
$40.0 million
to be used by Avinger in connection with the commercialization of its lumivascular catheter devices and the development of Avinger's lumivascular atherectomy device. Of the
$40.0 million
initially available to Avinger, we funded an initial
$20.0 million
, net of fees, at the close of the transaction. The additional
$20.0 million
in the form of a second tranche is no longer available to Avinger. Outstanding borrowings under the initial loan bear interest at a stated rate of
12%
per annum.
Avinger is required to make quarterly interest and principal payments. Principal repayment will commence on: (i) the eleventh interest payment date if the revenue milestone is not achieved or (ii) the thirteenth interest payment date if the revenue milestone is achieved. The principal amount outstanding at commencement of repayment, after taking into account any payment-in-kind, will be repaid in equal installments until final maturity of the loan. The loan will mature in April 2018.
In connection with entering into the credit agreement, the Company will receive a low, single-digit royalty on Avinger's net revenues through April 2018. Avinger may prepay the outstanding principal and accrued interest on the note receivable at any time. If Avinger repays the note receivable prior to April 2018, the royalty on Avinger's net revenues will be reduced by
50%
and will be subject to certain minimum payments from the prepayment date through April 2018.
The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Avinger and any of its subsidiaries (other than controlled foreign corporations, if any). The credit agreement provides for a number of standard events of default, including payment, bankruptcy, covenant, representation and warranty and judgment defaults.
LENSAR Credit Agreement
On October 1, 2013, PDL entered into a credit agreement with LENSAR, under which PDL made available to LENSAR up to
$60 million
to be used by LENSAR in connection with the commercialization of its currently marketed LENSAR™ Laser System. Of the
$60 million
available to LENSAR, an initial
$40 million
, net of fees, was funded by the Company at the close of the transaction. Upon attainment by LENSAR of a specified sales milestone to be accomplished no later than September 30, 2014, PDL will fund LENSAR an additional
$20 million
. Outstanding borrowings under the loans bear interest at the rate of
15.5%
per annum, payable quarterly in arrears.
Principal repayment will commence on the thirteenth interest payment date or
December 31, 2016
. The principal amount outstanding at the commencement of repayment will be repaid in equal installments until final maturity of the loans. The loans will mature on October 1, 2018. LENSAR may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The loans are secured by all of the assets of LENSAR.
Durata Credit Agreement
On October 31, 2013, PDL entered into a credit agreement with Durata, under which the Company made available to Durata up to
$70.0 million
. Of the
$70.0 million
available to Durata, an initial
$25.0 million
(tranche one), net of fees, was funded by the Company at the close of the transaction. On May 27, 2014, the Company funded Durata an additional
$15 million
(tranche two) as a result of Durata's marketing approval of dalbavancin in the United States, which occurred on May 23, 2014, and was the milestone needed to receive the tranche two funding. Within
9 months
after the occurrence of the tranche two milestone, Durata may request up to a single additional
$30 million
borrowing. Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bore interest at the rate of
14.0%
per annum, payable quarterly in arrears. Upon occurrence of the tranche two milestone, the interest rate of the loans decreased to
12.75%
.
Principal repayment will commence on the fifth interest payment date, March 31, 2015. The principal amount outstanding will be repaid quarterly over the remainder of the loans in an increasing percentage of the principal outstanding at commencement of repayment. The loans will mature on October 31, 2018. Durata may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The Company is entitled to receive a fee in addition to the
prepayment penalty in the event that Durata undergoes a change in control. The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Durata.
Direct Flow Credit Agreement
On November 5, 2013, PDL entered into a credit agreement with Direct Flow Medical, under which PDL will provide up to
$50.0 million
to Direct Flow Medical. Of the
$50.0 million
available to Direct Flow Medical, an initial
$35.0 million
(tranche one), net of fees, was funded by the Company at the close of the transaction. Upon the attainment of a specified revenue milestone to be accomplished no later than December 31, 2014 (the tranche two milestone), the Company will fund Direct Flow Medical an additional
$15.0 million
, net of fees. Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bear interest at the rate of
15.5%
per annum, payable quarterly in arrears. Upon occurrence of the tranche two milestone, the interest rate of the loans will decrease to
13.5%
.
Principal repayment will commence on the twelfth interest payment date, September 30, 2016. The principal amount outstanding at commencement of repayment will be repaid in equal installments until final maturity of the loans. The loans will mature on November 5, 2018. Direct Flow Medical may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Direct Flow Medical and any of its subsidiaries.
Paradigm Spine Credit Agreement
On February 14, 2014, the Company entered into a credit agreement with Paradigm Spine, under which it made available to Paradigm Spine up to
$75.0 million
to be used by Paradigm Spine to refinance its existing credit facility and expand its domestic commercial operations. Of the
$75.0 million
available to Paradigm Spine, an initial
$50 million
, net of fees, was funded by the Company at the close of the transaction. Upon the attainment of specified sales and other milestones before December 31, 2014, the Company will fund Paradigm Spine between an additional
$6.25 million
and
$12.5 million
, at Paradigm Spine’s discretion. Upon the attainment of specified sales and other milestones before June 30, 2015, the Company will fund Paradigm Spine up to an additional
$12.5 million
, also at Paradigm Spine’s discretion. Borrowings under the credit agreement bear interest at the rate of
13.0%
per annum, payable quarterly in arrears.
Principal repayment will commence on the twelfth interest payment date, December 31, 2016. The principal amount outstanding at commencement of repayment will be repaid in equal installments until final maturity of the loans. The loans will mature on February 14, 2019, or, if Paradigm Spine has achieved the first milestone and the additional loan amount is provided to Paradigm, the loans will mature on August 14, 2019. Paradigm Spine may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Paradigm Spine and its domestic subsidiaries and, initially, certain assets of Paradigm Spine’s German subsidiaries.
kaléo Note Purchase Agreement
On April 1, 2014, PDL entered into a note purchase agreement with Accel 300, a wholly-owned subsidiary of kaléo, pursuant to which the Company acquired
$150 million
of secured notes due 2029. The secured notes were issued pursuant to an indenture between Accel 300 and U.S. Bank, National Association, as trustee, and are secured by
100 percent
of the royalties from kaléo’s first approved product, Auvi-Q™ (epinephrine auto-injection, USP) (known as Allerject in Canada),
10 percent
of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection) (collectively, the "Revenue Interests"), and by a pledge of kaléo’s equity ownership in Accel 300.
The secured notes bear interest at
13 percent
per annum, paid quarterly in arrears on principal outstanding. The principal balance of the secured notes is repaid to the extent that the Revenue Interests exceed the quarterly interest payment, as limited by a quarterly payment cap. The final maturity of the secured notes is March 2029. Kaléo may redeem the secured notes at any time, subject to a redemption premium.
For carrying value and fair value information related to our notes receivable and other long-term receivables, see Note 3.
7. Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
(In thousands)
|
|
|
|
|
Compensation
|
|
$
|
1,829
|
|
|
$
|
768
|
|
Interest
|
|
6,128
|
|
|
2,925
|
|
Deferred revenue
|
|
553
|
|
|
—
|
|
Foreign currency hedge
|
|
4,199
|
|
|
7,355
|
|
Dividend payable
|
|
48,315
|
|
|
59
|
|
Legal
|
|
400
|
|
|
324
|
|
Other
|
|
511
|
|
|
426
|
|
Total
|
|
$
|
61,935
|
|
|
$
|
11,857
|
|
8. Commitments and Contingencies
Legal Proceedings
Resolution of Past Challenges to the Queen et al. Patents in the United States and Europe
Settlement with Novartis
On February 25, 2011, we reached a settlement with Novartis. Under the settlement agreement, PDL agreed to dismiss its claims against Novartis in its action in Nevada state court which also includes Genentech and Roche as defendants. Novartis agreed to withdraw its opposition appeal in the EPO challenging the validity of the ‘216B Patent. Under the settlement agreement with Novartis, we will pay Novartis certain amounts based on net sales of Lucentis made by Novartis during calendar year 2011 and beyond. The settlement does not affect our claims against Genentech and Roche in the Nevada state court action. We do not currently expect such amount to materially impact our total annual revenues.
Genentech / Roche Matter
Settlement Agreement
On January 31, 2014, we entered into the Settlement Agreement with Genentech and Roche which resolves all outstanding legal disputes between the parties, including our Nevada litigation with Genentech relating to an August 2010 facsimile sent by Genentech on behalf of Roche and Novartis asserting its products do not infringe on PDL’s SPC’s, and our arbitration proceedings with Genentech related to the audit of royalties on sales.
Under the terms of the Settlement Agreement, effective retroactively to August 15, 2013, Genentech will pay a fixed royalty rate of
2.125 percent
on worldwide sales of Avastin, Herceptin, Xolair, Perjeta and Kadcyla occurring on or before December 31, 2015, as compared to the previous tiered royalty rate in the U.S and the fixed rate on all ex-U.S.-based Manufacturing and Sales. Pursuant to the agreement, Genentech and Roche confirmed that Avastin, Herceptin, Lucentis, Xolair and Perjeta are licensed products as defined in the relevant license agreements between the parties, and further agreed that Kadcyla and Gazyva are licensed products. With respect to Lucentis, Genentech owes no royalties on U.S. sales occurring after June 30, 2013, and will pay a royalty of
2.125 percent
on all ex-U.S.-based Sales occurring on or before December 28, 2014. The royalty term for Gazyva remains unchanged from the existing license agreement pertaining thereto.
The agreement precludes Genentech and Roche from challenging the validity of PDL’s patents, including its SPCs in Europe, from contesting their obligation to pay royalties, from contesting patent coverage for Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla and Gazyva and from assisting or encouraging any third party in challenging PDL’s patents and SPCs. The agreement further outlines the conduct of any audits initiated by PDL of the books and records of Genentech in an effort to ensure a full and fair audit procedure. Finally, the agreement clarifies that the sales amounts from which the royalties are calculated does not include certain taxes and discounts.
Other Legal Proceedings
In addition, from time to time, we are subject to various other legal proceedings and claims that arise in the ordinary course of business and that we do not expect to materially impact our financial statements.
Lease Guarantee
In connection with the Spin-Off, we entered into amendments to the leases for our former facilities in Redwood City, California, under which Facet was added as a co-tenant, and a Co-Tenancy Agreement, under which Facet agreed to indemnify us for all matters related to the leases attributable to the period after the Spin-Off date. Should Facet default under its lease obligations, we could be held liable by the landlord as a co-tenant and, thus, we have in substance guaranteed the payments under the lease agreements for the Redwood City facilities. As of
June 30, 2014
, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately
$84.6 million
. In April 2010, Abbot acquired Facet and later renamed the entity AbbVie Biotherapeutics, Inc. If AbbVie Biotherapeutics, Inc.were to default, we could also be responsible for lease related costs including utilities, property taxes and common area maintenance, which may be as much as the actual lease payments.
We have recorded a liability of
$10.7 million
on our Condensed Consolidated Balance Sheets as of
June 30, 2014
, and December 31,
2013
, related to this guarantee. In future periods, we may adjust this liability for any changes in the ultimate outcome of this matter that are both probable and estimable.
9. Convertible Notes and Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance Outstanding
|
|
Carrying Value
|
|
|
|
|
June 30,
|
|
June 30,
|
|
December 31,
|
Description
|
|
Maturity Date
|
|
2014
|
|
2014
|
|
2013
|
(In thousands)
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
|
|
|
|
|
|
|
Series 2012 Notes
|
|
February 15, 2015
|
|
$
|
48,311
|
|
|
$
|
47,160
|
|
|
$
|
172,630
|
|
May 2015 Notes
|
|
May 1, 2015
|
|
$
|
155,250
|
|
|
150,797
|
|
|
148,253
|
|
February 2018 Notes
|
|
February 1, 2018
|
|
$
|
300,000
|
|
|
272,824
|
|
|
—
|
|
Term loan
|
|
October 28, 2014
|
|
$
|
37,500
|
|
|
37,364
|
|
|
74,397
|
|
Total
|
|
|
|
|
|
|
$
|
508,145
|
|
|
$
|
395,280
|
|
As of
June 30, 2014
, PDL was in compliance with all applicable debt covenants, and embedded features of all debt agreements were evaluated and did not need to be accounted for separately.
Series 2012 Notes
In January 2012, we exchanged
$169.0 million
aggregate principal of new Series 2012 Notes for an identical principal amount of our February 2015 Notes, plus a cash payment of
$5.00
for each
$1,000
principal amount tendered, totaling approximately
$845,000
. The cash incentive payment was allocated to deferred issue costs of
$765,000
, additional paid-in capital of
$52,000
and deferred tax assets of
$28,000
. The deferred issue costs will be recognized over the life of the Series 2012 Notes as interest expense. In February 2012, we entered into separate privately negotiated exchange agreements under which we exchanged an additional
$10.0 million
aggregate principal amount of the new Series 2012 Notes for an identical principal amount of our February 2015 Notes. In August 2013, the Company entered into a separate privately negotiated exchange agreement under which it retired the final
$1.0 million
aggregate principal amount of the Company's outstanding February 2015 Notes. Pursuant to the exchange agreement, the holder of the February 2015 Notes received
$1.0 million
aggregate principal amount of the Company's Series 2012 Notes. Immediately following the exchange,
no
principal amount of the February 2015 Notes remained outstanding and
$180.0 million
principal amount of the Series 2012 Notes was outstanding.
On February 6, 2014, the Company entered into exchange and purchase agreements with certain holders of approximately
$131.7 million
aggregate principal amount of outstanding Series 2012 Notes. The exchange agreement provided for the issuance by the Company of shares of common stock and a cash payment for the Series 2012 Notes being exchanged, and the
purchase agreement provided for a cash payment for the Series 2012 Notes being repurchased. The total consideration given was approximately
$191.8 million
. The Company issued to the participating holders of the February 2015 Notes, a total of approximately
20.3 million
shares of its common stock with a fair value of approximately
$157.6 million
and made an aggregate cash payment of approximately
$34.2 million
pursuant to the exchange and purchase agreements. Of the
$34.2 million
cash payment,
$2.5 million
is attributable to an inducement fee,
$1.8 million
is attributable to interest accrued through the date of settlement and
$29.9 million
is attributable to the repurchase of the Series 2012 Notes. It was determined that the exchange and purchase agreement represented an extinguishment of the related notes. As a result, a loss on extinguishment of
$6.1 million
was recorded. The
$6.1 million
loss on extinguishment included the derecognition of the original issuance discount of
$5.8 million
and a
$0.3 million
charge resulting from the difference of the face value of the notes and the fair value of the notes. Immediately following the exchange,
$48.3 million
principal amount of the Series 2012 Notes was outstanding with approximately
$2.1 million
of remaining original issuance discount to be amortized over the remaining life of the Series 2012 Notes.
The terms of the Series 2012 Notes are governed by the indenture dated as of January 5, 2012, and include a net share settlement feature, meaning that if a conversion occurs, the principal amount will be settled in cash and the excess, if any, will be settled in the Company’s common stock. The Series 2012 Notes may not be redeemed by the Company prior to their stated maturity date. Our Series 2012 Notes are due February 15, 2015, and bear interest at a rate of
2.875%
per annum, payable semi-annually in arrears on February 15 and August 15 of each year.
Holders may convert their Series 2012 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date of the Series 2012 Notes under the following circumstances:
|
|
•
|
During any fiscal quarter commencing after the fiscal quarter ending December 31, 2011, if the closing price of the Company’s common stock for at least
20
trading days in a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130%
of the conversion price for the Series 2012 Notes on the last day of such preceding fiscal quarter;
|
|
|
•
|
During the
five
business-day period immediately after any
five
consecutive trading-day period in which the trading price per
$1,000
principal amount of the Series 2012 Notes for each trading day of that measurement period was less than
98%
of the product of the closing price of the Company’s common stock and the conversion rate for the Series 2012 Notes for that trading day;
|
|
|
•
|
Upon the occurrence of certain corporate transactions as provided in the indenture; or
|
|
|
•
|
Anytime, at the holder’s option, beginning on August 15, 2014.
|
Holders of our Series 2012 Notes who convert their Series 2012 Notes in connection with a fundamental change resulting in the
reclassification, conversion, exchange or cancellation of our common stock may be entitled to a make-whole premium in the form of an increase in the conversion rate. Such fundamental change is generally defined to include a merger involving PDL, an acquisition of a majority of PDL’s outstanding common stock and a change of a majority of PDL’s board of directors without the approval of the board of directors.
We allocated
$2.3 million
of the remaining deferred February 2015 Notes original issue discount as of the date of the exchange to the Series 2012 Notes based on the percentage of the February 2015 Notes exchanged. In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we were required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, we separated the principal balance of the Series 2012 Notes, net of the allocated original issue discount, between the fair value of the debt component and the common stock conversion feature. Using an assumed borrowing rate of
7.3%
, which represents the estimated market interest rate for a similar nonconvertible instrument available to us during the period of the exchange transactions, we recorded a total debt discount of
$16.8 million
, allocated
$10.9 million
to additional paid-in capital and
$5.9 million
to deferred tax liability. The discount is being amortized to interest expense over the term of the Series 2012 Notes and increases interest expense during the term of the Series 2012 Notes from the
2.875%
cash coupon interest rate to an effective interest rate of
7.3%
. The common stock conversion feature is recorded as a component of stockholders’ equity.
The principal amount, carrying value and unamortized discount of our Series 2012 Notes were as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
December 31, 2013
|
Principal amount of the Series 2012 Notes
|
|
$
|
48,311
|
|
|
$
|
180,000
|
|
Unamortized discount of liability component
|
|
(1,151
|
)
|
|
(7,370
|
)
|
Total
|
|
$
|
47,160
|
|
|
$
|
172,630
|
|
Interest expense for our Series 2012 Notes on the Condensed Consolidated Statements of Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(In thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Contractual coupon interest
|
|
$
|
347
|
|
|
$
|
1,287
|
|
|
$
|
1,108
|
|
|
$
|
2,573
|
|
Amortization of debt issuance costs
|
|
62
|
|
|
287
|
|
|
932
|
|
|
571
|
|
Amortization of debt discount
|
|
399
|
|
|
1,513
|
|
|
1,379
|
|
|
3,000
|
|
Total
|
|
$
|
808
|
|
|
$
|
3,087
|
|
|
$
|
3,419
|
|
|
$
|
6,144
|
|
As of
June 30, 2014
, our Series 2012 Notes are convertible into
188.812
shares of the Company’s common stock per
$1,000
of principal amount, or approximately
$5.30
per common share, subject to further adjustment upon certain events including dividend payments. As of
June 30, 2014
, the remaining discount amortization period was
0.6 years
.
Our common stock exceeded the conversion threshold price of
$7.00
per common share for at least
20
days during the
30
consecutive trading days ended March 31, 2014; accordingly, the Series 2012 Notes were convertible at the option of the holder during the quarter ended
June 30, 2014
. Our common stock price exceeded the conversion threshold price of
$6.89
per common share for at least
20
days during the
30
consecutive trading days ended
June 30, 2014
; accordingly, the Series 2012 Notes are convertible at the option of the holder during the quarter ending September 30, 2014. The Series 2012 Notes have been classified as current as the notes will be due upon demand within
one
year of the quarter ended
June 30, 2014
. At
June 30, 2014
, the if-converted value of our Series 2012 Notes exceeded their principal amount by approximately
$40.0 million
.
May 2015 Notes
On May 16, 2011, we issued
$155.3 million
in aggregate principal amount, at par, of our May 2015 Notes in an underwritten public offering, for net proceeds of
$149.7 million
. Our May 2015 Notes are due May 1, 2015, and we pay interest at
3.75%
on our May 2015 Notes semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2011. Proceeds from our May 2015 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem our 2012 Notes. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require PDL to repurchase their May 2015 Notes at a purchase price equal to
100%
of the principal, plus accrued interest.
Our May 2015 Notes are convertible under any of the following circumstances:
|
|
•
|
During any fiscal quarter ending after the quarter ending June 30, 2011, if the last reported sale price of our common stock for at least
20
trading days in a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130%
of the conversion price for the notes on the last day of such preceding fiscal quarter;
|
|
|
•
|
During the
five
business-day period immediately after any
five
consecutive trading-day period, which we refer to as the measurement period, in which the trading price per
$1,000
principal amount of notes for each trading day of that measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate for the notes for each such day;
|
|
|
•
|
Upon the occurrence of specified corporate events as described further in the indenture; or
|
|
|
•
|
At any time on or after November 1, 2014.
|
In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we were required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, we separated the principal balance of our May 2015 Notes between the fair value of the debt component and the fair value of the common stock conversion feature. Using an assumed borrowing rate of
7.5%
, which represents the estimated market interest rate for a similar nonconvertible instrument available to us on the date of issuance, we recorded a total debt discount of
$18.9 million
, allocated
$12.3 million
to additional paid-in capital and allocated
$6.6 million
to deferred tax liability. The discount is being amortized to interest expense over the term of our May 2015 Notes and increases interest expense during the term of our May 2015 Notes from the
3.75%
cash coupon interest rate to an effective interest rate of
7.5%
. As of
June 30, 2014
, the remaining discount amortization period is
0.8 years
.
The carrying value and unamortized discount of our May 2015 Notes were as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
|
December 31, 2013
|
Principal amount of the May 2015 Notes
|
|
$
|
155,250
|
|
|
$
|
155,250
|
|
Unamortized discount of liability component
|
|
(4,453
|
)
|
|
(6,997
|
)
|
Total
|
|
$
|
150,797
|
|
|
$
|
148,253
|
|
Interest expense for our May 2015 Notes on the Condensed Consolidated Statements of Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(In thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Contractual coupon interest
|
|
$
|
1,456
|
|
|
$
|
1,455
|
|
|
$
|
2,911
|
|
|
$
|
2,911
|
|
Amortization of debt issuance costs
|
|
317
|
|
|
307
|
|
|
632
|
|
|
611
|
|
Amortization of debt discount
|
|
1,283
|
|
|
1,194
|
|
|
2,544
|
|
|
2,366
|
|
Total
|
|
$
|
3,056
|
|
|
$
|
2,956
|
|
|
$
|
6,087
|
|
|
$
|
5,888
|
|
As of
June 30, 2014
, our May 2015 Notes are convertible into
165.4367
shares of the Company’s common stock per $1,000 of principal amount, or approximately
$6.04
per common share, subject to further adjustment upon certain events including dividend payments.
Our common stock exceeded the conversion threshold price of
$7.99
for at least
20
days during the
30
consecutive trading days ended March 31, 2014; accordingly, the May 2015 Notes were convertible at the option of the holder during the quarter ended
June 30, 2014
. Our common stock price exceeded the conversion threshold price of
$7.86
per common share for at least
20
days during the
30
consecutive trading days ended
June 30, 2014
; accordingly, the May 2015 Notes are convertible at the option of the holder during the quarter ending September 30, 2014. At
June 30, 2014
, the if-converted value of our May 2015 exceeded their principal amount by approximately
$93.4 million
.
Purchased Call Options and Warrants
In connection with the issuance of our May 2015 Notes, we entered into purchased call option transactions with
two
hedge counterparties. We paid an aggregate amount of
$20.8 million
, plus legal fees, for the purchased call options with terms substantially similar to the embedded conversion options in our May 2015 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in our May 2015 Notes, approximately
25.7 million
shares of our common stock. We may exercise the purchased call options upon conversion of our May 2015 Notes and require the hedge counterparty to deliver shares to the Company in an amount equal to the shares required to be delivered by the Company to the note holder for the excess conversion value. The purchased call options expire on May 1, 2015, or the last day any of our May 2015 Notes remain outstanding.
In addition, we sold to the hedge counterparties warrants exercisable, on a cashless basis, for the sale of rights to receive up to
27.5 million
shares of common stock underlying our May 2015 Notes. We received an aggregate amount of
$10.9 million
for the sale from the two counterparties. The warrant counterparties may exercise the warrants on their specified expiration dates that occur over a period of time ending on January 20, 2016. If the VWAP of our common stock, as defined in the warrants,
exceeds the strike price of the warrants on the date of conversion, we will deliver to the warrant counterparties shares equal to the spread between the VWAP on the date of exercise or expiration and the strike price. If the VWAP is less than the strike price, neither party is obligated to deliver anything to the other.
The purchased call option transactions and warrant sales effectively serve to reduce the potential dilution associated with conversion of our May 2015 Notes. The strike prices are approximately
$6.04
and
$7.11
, subject to further adjustment upon certain events including dividend payments, for the purchased call options and warrants, respectively.
If the share price is above
$6.04
, but below
$7.11
, upon conversion of our May 2015 Notes, the purchased call options will offset the share dilution, because the Company will receive shares on exercise of the purchased call options equal to the shares that the Company must deliver to the note holders. If the share price is above
$7.11
, upon exercise of the warrants, the Company will deliver shares to the counterparties in an amount equal to the excess of the share price over
$7.11
. For example, a 10% increase in the share price above
$7.11
would result in the issuance of
2.0 million
incremental shares upon exercise of the warrants. If our share price continues to increase, additional dilution would occur.
While the purchased call options are expected to reduce the potential equity dilution upon conversion of our May 2015 Notes, prior to conversion or exercise, our May 2015 Notes and the warrants could have a dilutive effect on the Company’s earnings per share to the extent that the price of the Company’s common stock during a given measurement period exceeds the respective exercise prices of those instruments. As of
June 30, 2014
, and
December 31, 2013
, the market price condition for convertibility of our May 2015 Notes was not met and there were no related purchased call options or warrants exercised.
The purchased call options and warrants are considered indexed to PDL stock, require net-share settlement and met all criteria for equity classification at inception and at
June 30, 2014
, and
December 31, 2013
. The purchased call options cost, including legal fees, of
$20.8 million
, less deferred taxes of
$7.2 million
, and the
$10.9 million
received for the warrants, was recorded as adjustments to additional paid-in capital. Subsequent changes in fair value will not be recognized as long as the purchased call options and warrants continue to meet the criteria for equity classification.
February 2018 Notes
On February 12, 2014, we issued
$300 million
in aggregate principal amount, at par, of our February 2018 Notes in an underwritten public offering, for net proceeds of
$290.2 million
. Our February 2018 Notes are due February 1, 2018, and we pay interest at
4.0%
on our February 2018 Notes semiannually in arrears on February 1 and August 1 of each year, beginning August 1, 2014. A portion of the proceeds from our February 2018 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem
$131.7 million
of our Series 2012 Notes. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require PDL to repurchase their February 2018 Notes at a purchase price equal to
100%
of the principal, plus accrued interest.
Our February 2018 Notes are convertible under any of the following circumstances:
|
|
•
|
During any fiscal quarter ending after the quarter ending June 30, 2014, if the last reported sale price of our common stock for at least
20
trading days in a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130%
of the conversion price for the notes on the last day of such preceding fiscal quarter;
|
|
|
•
|
During the
five
business-day period immediately after any
five
consecutive trading-day period, which we refer to as the measurement period, in which the trading price per
$1,000
principal amount of notes for each trading day of that measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate for the notes for each such day;
|
|
|
•
|
Upon the occurrence of specified corporate events as described further in the indenture; or
|
|
|
•
|
At any time on or after August 1, 2017.
|
The initial conversion rate for the February 2018 Notes is
109.1048
shares of Company common stock per
$1,000
principal amount of February 2018 Notes, which is equivalent to an initial conversion price of approximately
$9.17
per share of common stock, subject to adjustments upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company will be required to pay cash and, if applicable, deliver shares of Company common stock as described in the Indenture.
In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we were required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, we separated the principal balance of our February 2018 Notes between the fair value of the debt component and the fair value of the common stock conversion feature. Using an assumed borrowing rate of
7.0%
which represents the estimated market interest rate for a similar nonconvertible instrument available to us on the date of issuance, we recorded a total debt discount of
$29.7 million
, allocated
$19.3 million
to additional paid-in capital and allocated
$10.4 million
to deferred tax liability. The discount is being amortized to interest expense over the term of our February 2018 Notes and increases interest expense during the term of our February 2018 Notes from the
4.0%
cash coupon interest rate to an effective interest rate of
6.9%
. As of
June 30, 2014
, the remaining discount amortization period is
3.6 years
.
The carrying value and unamortized discount of our February 2018 Notes were as follows:
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2014
|
Principal amount of the February 2018 Notes
|
|
$
|
300,000
|
|
Unamortized discount of liability component
|
|
(27,176
|
)
|
Total
|
|
$
|
272,824
|
|
Interest expense for our February 2018 Notes on the Condensed Consolidated Statements of Income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(In thousands)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Contractual coupon interest
|
|
$
|
3,062
|
|
|
$
|
—
|
|
|
$
|
4,633
|
|
|
$
|
—
|
|
Amortization of debt issuance costs
|
|
600
|
|
|
—
|
|
|
822
|
|
|
—
|
|
Amortization of debt discount
|
|
1,879
|
|
|
—
|
|
|
2,550
|
|
|
—
|
|
Total
|
|
$
|
5,541
|
|
|
$
|
—
|
|
|
$
|
8,005
|
|
|
$
|
—
|
|
As of
June 30, 2014
, our February 2018 Notes are not convertible. At
June 30, 2014
, the if-converted value of our February 2018 Notes exceeded the principal amount by approximately
$16.8 million
.
Purchased Call Options and Warrants
In connection with the issuance of our February 2018 Notes, we entered into purchased call option transactions with
two
hedge counterparties. We paid an aggregate amount of
$31.0 million
for the purchased call options with terms substantially similar to the embedded conversion options in our February 2018 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in our February 2018 Notes, approximately
32.7 million
shares of our common stock. We may exercise the purchased call options upon conversion of our February 2018 Notes and require the hedge counterparty to deliver shares to the Company in an amount equal to the shares required to be delivered by the Company to the note holder for the excess conversion value. The purchased call options expire on February 1, 2018, or the last day any of our February 2018 Notes remain outstanding.
In addition, we sold to the hedge counterparties warrants exercisable, on a cashless basis, for the sale of rights to receive shares of common stock that will initially underlie our February 2018 Notes at a strike price of
$10.3610
per share, which represents a premium of approximately 30% over the last reported sale price of the Company's common stock of
$7.97
on February 6, 2014. The warrant transactions could have a dilutive effect to the extent that the market price of the Company's common stock exceeds the applicable strike price of the warrants on the date of conversion. We received an aggregate amount of
$11.4 million
for the sale from the two counterparties. The warrant counterparties may exercise the warrants on their specified expiration dates that occur over a period of time. If the VWAP of our common stock, as defined in the warrants, exceeds the strike price of the warrants, we will deliver to the warrant counterparties shares equal to the spread between the VWAP on the date of exercise or expiration and the strike price. If the VWAP is less than the strike price, neither party is obligated to deliver anything to the other.
The purchased call option transactions and warrant sales effectively serve to reduce the potential dilution associated with conversion of our February 2018 Notes. The strike price is subject to further adjustment in the event that future quarterly dividends exceed
$0.15
per share.
The purchased call options and warrants are considered indexed to PDL stock, require net-share settlement, and met all criteria for equity classification at inception and at
June 30, 2014
. The purchased call options cost of
$31.0 million
, less deferred taxes of
$10.8 million
, and the
$11.4 million
received for the warrants, was recorded as adjustments to additional paid-in capital. Subsequent changes in fair value will not be recognized as long as the purchased call options and warrants continue to meet the criteria for equity classification.
Term Loan
On October 28, 2013, PDL entered into a credit agreement among the Company, the lenders party thereto and the Royal Bank of Canada, as administrative agent. The Term Loan amount was for
$75 million
, with a term of one year.
The interest rates per annum applicable to amounts outstanding under the Term Loan are, at the Company’s option, either (a) the base rate plus
1.00%
, or (b) the Eurodollar rate plus 2.00% per annum. As of
June 30, 2014
, the interest rate was
2.22%
. Interest and the remaining principal payments associated with the Term Loan are due on the interest payment date of July 31, 2014, with the remaining outstanding balance due on October 28, 2014. The principal balance outstanding as of June 30, 2014, is
$37.5 million
.
Any future material domestic subsidiaries of the Company are required to guarantee the obligations of the Company under the Term Loan, except as otherwise provided. The Company’s obligations under the Term Loan are secured by a lien on a substantial portion of the Company's assets.
The Term Loan contains affirmative and negative covenants that the Company believes are usual and customary for a senior secured credit agreement. The Term Loan also requires compliance with certain financial covenants, including a maximum total leverage ratio and a debt service coverage ratio, in each case calculated as set forth in the Term Loan and compliance with which may be necessary to take certain corporate actions. The Term Loan contains events of default that the Company believes are usual and customary for a senior secured credit agreement.
10. Other Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2014
|
|
2013
|
(In thousands)
|
|
|
|
|
Accrued lease liability
|
|
$
|
10,700
|
|
|
$
|
10,700
|
|
Long term incentive accrual
|
|
795
|
|
|
—
|
|
Uncertain tax positions
|
|
16,607
|
|
|
10,826
|
|
Long-term deferred tax liabilities
|
|
10,404
|
|
|
—
|
|
Foreign currency hedge
|
|
—
|
|
|
1,516
|
|
Total
|
|
$
|
38,506
|
|
|
$
|
23,042
|
|
11. Stock-Based Compensation
The Company grants stock options and restricted stock awards pursuant to a stockholder approved stock-based incentive plan. This incentive plan is described in further detail in Note 15, Stock-Based Compensation, of Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended December 31,
2013
.
The following table summarizes the Company’s stock option and restricted stock award activity during the
six months ended June 30, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Restricted Stock Awards
|
(In thousands except per share amounts)
|
|
Shares Available for Grant
|
|
Number of Shares Outstanding
|
|
Weighted Average Exercise Price
|
|
Number of Shares Outstanding
|
|
Weighted Average Grant-date Fair Value Per Share
|
Balance December 31, 2013
|
|
4,478
|
|
|
172
|
|
|
$
|
16.52
|
|
|
114
|
|
|
$
|
7.45
|
|
Granted
|
|
(296
|
)
|
|
—
|
|
|
|
|
296
|
|
|
$
|
8.32
|
|
Shares released
|
|
—
|
|
|
—
|
|
|
|
|
(38
|
)
|
|
$
|
8.37
|
|
Forfeited or canceled
|
|
105
|
|
|
(105
|
)
|
|
$
|
22.60
|
|
|
—
|
|
|
|
Plan shares expired
|
|
(105
|
)
|
|
—
|
|
|
|
|
—
|
|
|
|
Balance at June 30, 2014
|
|
4,182
|
|
|
67
|
|
|
$
|
7.04
|
|
|
372
|
|
|
$
|
8.05
|
|
12. Cash Dividends
On
January 29, 2014
, our board of directors declared that the regular quarterly dividends to be paid to our stockholders in
2014
will be
$0.15
per share of common stock, payable on
March 12
,
June 12
,
September 12
and
December 12
of
2014
to stockholders of record on
March 5
,
June 5
,
September 5
and
December 5
of
2014
, the record dates for each of the dividend payments, respectively.
In connection with the
June 12, 2014
, dividend payment, the conversion rates for our convertible notes adjusted as follows:
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
Conversion Rate per $1,000 Principal Amount
|
|
Approximate Conversion Price Per Common Share
|
|
Effective Date
|
Series 2012 Notes
|
|
188.812
|
|
|
$
|
5.30
|
|
|
June 3, 2014
|
May 2015 Notes
|
|
165.4367
|
|
|
$
|
6.04
|
|
|
June 3, 2014
|
13. Income Taxes
For the three and six months ended June 31, 2014 and 2013, income tax expense was primarily derived by applying the federal statutory rate of
35%
to operating income before income taxes.
The uncertain tax position increased during the six months ended June 30, 2014, by
$5.8 million
from the estimated state tax liability as a result of increased revenues. We expect to release tax liabilities related to uncertain tax positions related to federal tax credits taken on the 2009 income tax return in the third quarter of 2014 of approximately
$6.5 million
, which will result in a reduction to income tax expense.
In general, our income tax returns are subject to examination by tax authorities for tax years 1996 forward. The California Franchise Tax Board is currently examining the Company’s 2008, 2009 and 2010 tax returns. Although the timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year, we do not anticipate any material change to the amount of our unrecognized tax benefits over the next 12 months, except as described above.
14. Accumulated Other Comprehensive Income (Loss)
Comprehensive income is comprised of net income and other comprehensive income (loss). We include unrealized net gains (losses) on investments held in our available-for-sale securities and unrealized gains (losses) on our cash flow hedges in other comprehensive income (loss), and present the amounts net of tax. Our other comprehensive income (loss) is included in our Condensed Consolidated Statements of Comprehensive Income.
The balance of accumulated other comprehensive income (loss), net of tax, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available-for-sale securities
|
|
Unrealized gains (losses) on cash flow hedges
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
(In thousands)
|
|
|
|
|
|
|
Beginning Balance at December 31, 2013
|
|
$
|
1,129
|
|
|
$
|
(6,017
|
)
|
|
$
|
(4,888
|
)
|
Activity for the six months ended June 30, 2014
|
|
(1,296
|
)
|
|
3,086
|
|
|
1,790
|
|
Ending Balance at June 30, 2014
|
|
$
|
(167
|
)
|
|
$
|
(2,931
|
)
|
|
$
|
(3,098
|
)
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, including any statements concerning new licensing, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue” or “opportunity,” or the negative thereof or other comparable terminology. Although we believe that the expectations presented in the forward-looking statements contained herein are reasonable at the time they were made, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below or incorporated by reference herein, and for the reasons described elsewhere in this Quarterly Report. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ.
OVERVIEW
PDL manages a portfolio of patents and royalty assets, consisting primarily of its Queen et al. patents and license agreements with various biotechnology and pharmaceutical companies. PDL pioneered the humanization of monoclonal antibodies and, by doing so, enabled the discovery of a new generation of targeted treatments for cancer and immunologic diseases for which it receives significant royalty revenue. PDL is currently focused on intellectual property asset management, acquiring new income generating assets and maximizing value for its shareholders.
The Company was formerly known as Protein Design Labs, Inc. and changed its name to PDL BioPharma, Inc. in 2006. PDL was founded in 1986 and is headquartered in Incline Village, Nevada.
In 2011, PDL initiated a strategy to bring in new income generating assets from the healthcare sector. To accomplish this goal, PDL seeks to provide non-dilutive growth capital and financing solutions to late stage public and private healthcare companies and offers immediate financial monetization of royalty streams to companies, academic institutions and inventors. PDL continues to pursue this strategic initiative for which it has already invested approximately $715 million to date. PDL is focused on the quality of the income generating assets and potential returns on investment.
We continuously evaluate alternatives to increase return for our stockholders, for example, purchasing income generating assets, buying back or redeeming our convertible notes, repurchasing our common stock, paying dividends or selling the Company. At the beginning of each fiscal year, our board of directors reviews the Company's total annual dividend payment for the prior year and determines whether to increase, maintain or decrease the quarterly dividend payments for that year. The board of directors evaluates the financial condition of the Company and considers the economic outlook, corporate cash flow, the Company's liquidity needs and the health and stability of credit markets when determining whether to maintain or change the dividend.
Recent Developments
Genentech/Roche Settlement Agreement
On January 31, 2014, we entered into the Settlement Agreement with Genentech and Roche which resolves all outstanding legal disputes between the parties, including our Nevada litigation with Genentech relating to an August 2010 facsimile sent by Genentech on behalf of Roche and Novartis asserting its products do not infringe on PDL’s SPCs, and our arbitration proceedings with Genentech related to the audit of royalties on sales.
Under the terms of the Settlement Agreement, effective retroactively to August 15, 2013, Genentech will pay a fixed royalty rate of 2.125 percent on worldwide sales of Avastin, Herceptin, Xolair, Perjeta and Kadcyla occurring on or before December 31, 2015, as compared to the previous tiered royalty rate in the U.S and the fixed rate on all ex-U.S.-based Manufacturing and Sales. Pursuant to the agreement, Genentech and Roche confirmed that Avastin, Herceptin, Lucentis, Xolair and Perjeta are licensed products as defined in the relevant license agreements between the parties, and further agreed that Kadcyla and Gazyva are licensed products. With respect to Lucentis, Genentech owes no royalties on U.S. sales occurring after June 30, 2013, and will pay a royalty of 2.125 percent on all ex-U.S.-based Sales occurring on or before December 28, 2014. The royalty term for Gazyva remains unchanged from the existing license agreement pertaining thereto.
The agreement precludes Genentech and Roche from challenging the validity of PDL’s patents, including its SPCs in Europe, from contesting their obligation to pay royalties, from contesting patent coverage for Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla and Gazyva and from assisting or encouraging any third party in challenging PDL’s patents and SPCs. The agreement further outlines the conduct of any audits initiated by PDL of the books and records of Genentech in an effort to ensure a full and fair audit procedure. Finally, the agreement clarifies that the sales amounts from which the royalties are calculated does not include certain taxes and discounts.
The Settlement Agreement provides greater certainty for each of the parties in terms of the royalty rate payable under the agreement and the period over which they will be payable. PDL expects to recognize royalty revenue on the licensed products until the first quarter of 2016. Additionally, the settlement terms provide for a better definition of revenues and audit inspection procedures related to the arbitration dispute filed by PDL.
Dividend Payment and Effect on Conversion Rates for the Convertible Notes
On
January 29, 2014
, our board of directors declared that the regular quarterly dividends to be paid to our stockholders in
2014
will be
$0.15
per share of common stock, payable on
March 12
,
June 12
,
September 12
and
December 12
of
2014
to stockholders of record on
March 5
,
June 5
,
September 5
and
December 5
of
2014
, the record dates for each of the dividend payments, respectively. On
June 12, 2014
, we paid the regular quarterly dividend to our stockholders totaling
$24.0 million
using earnings generated in the
three months ended June 30, 2014
.
kaléo Note Purchase Agreement
On April 1, 2014, PDL entered into a note purchase agreement with Accel 300, a wholly-owned subsidiary of kaléo, pursuant to which the Company acquired $150 million of secured notes due 2029. The secured notes were issued pursuant to an indenture between Accel 300 and U.S. Bank, National Association, as trustee, and are secured by 100 percent of the royalties from kaléo’s first approved product, Auvi-Q™ (epinephrine auto-injection, USP) (known as Allerject in Canada), 10 percent of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection), and by a pledge of kaléo’s equity ownership in Accel 300.
The secured notes bear interest at 13 percent per annum, paid quarterly in arrears on principal outstanding. The principal balance of the secured notes is repaid to the extent that the royalties of Auvi-Q and EVZIO exceed the quarterly interest payment, as limited by a quarterly payment cap. The final maturity of the secured notes is March 2029. kaléo may redeem the secured notes at any time, subject to a redemption premium.
Durata Credit Agreement
On May 27, 2014, PDL funded Durata with an additional $15 million loan (tranche two) as a result of Durata's marketing approval of dalbavancin in the United States, which occurred on May 23, 2014, and was the milestone needed to receive the tranche two funding. Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bore interest at the rate of 14.0% per annum, payable quarterly in arrears. Upon occurrence of the tranche two milestone, the interest rate of the loans decreased to 12.75%.
VB Royalty Agreement
On June 26, 2014, PDL entered into the VB Royalty Agreement, whereby VB conveyed to the Company the right to receive royalties payable on sales of a PMA-approved spinal implant in exchange for a
$15.5 million
cash payment, less fees.
The royalty acquired includes royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company will receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company has received payments equal to two and three tenths times the cash payment made to VB, after which all rights to receive royalties will be returned to VB. VB may repurchase the royalty right at any time on or before June 26, 2018, for a specified amount. The acting chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement where negotiated separately.
The fair value of the royalty right at June 30, 2014, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is classified as a Level 3 asset, as our valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the licensed product. The discounted cash flow was based upon expected royalties from sales of licensed product over a nine year period. The discount rate utilized was approximately
17.5%
. Significant judgment is required in selecting the appropriate discount rate.
Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $1.4 million or increase by $1.7 million, respectively.
A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows. The fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. An evaluation of those estimates, discount rates utilized and general market conditions effecting fair market value will be performed in each reporting period.
As of June 30, 2014, the carrying value of the asset acquired as reported in our consolidated balance sheets was
$15.5 million
. As of June 30, 2014, the maximum loss exposure was
$15.5 million
.
Wellstat Diagnostics Note Receivable and Credit Agreement
On August 5, 2014, the Company received notice that the short term funding being provided pursuant to the agreement with the another lender entered into during June 2014, was being terminated. Wellstat Diagnostics remained in default because it was still unable to pay its debts as they became due. Accordingly, the Company delivered a notice of default to Wellstat Diagnostics, due to, inter alia, its on-going failure to pay its debts as they become due and Wellstat Diagnostics’ failure to comply with certain covenants by the deadlines to which the parties had agreed (the “Borrower Notice”). The Borrower Notice accelerates all obligations under the amended and restated credit agreement and demands immediate payment in full in an amount equal to
$53,939,820
, (which amount, in accordance with the terms of the amended and restated credit agreement, includes an amount that, together with interest and royalty payments already made to the Company, would generate a specified internal rate of return to the Company), plus accruing fees, costs and interest, and demands that Wellstat Diagnostics protect and preserve all collateral securing its obligations. On August 7, 2014, the Company delivered a notice to each of the guarantors of Wellstat Diagnostics’ obligations to the Company under the credit agreement (the “Guarantor Notice”). The Guarantor Notice includes a demand that the guarantors remit payment to the Company in the amount of the outstanding obligations. The guarantors include certain affiliates and related companies of Wellstat Diagnostics, as well as Wellstat Diagnostics’ shareholders. The Company is evaluating the remedies available to it at this time.
Intellectual Property
Patents
We have been issued patents in the United States and elsewhere, covering the humanization of antibodies, which we refer to as our Queen et al. patents. Our Queen et al. patents, for which final patent expiry is in December 2014, cover, among other things, humanized antibodies, methods for humanizing antibodies, polynucleotide encoding in humanized antibodies and methods of producing humanized antibodies.
Our '761 Patent, which expires on December 2, 2014, covers methods and materials used in the manufacture of humanized antibodies. In addition to covering methods and materials used in the manufacture of humanized antibodies, coverage under our ‘761 Patent will typically extend to the use or sale of compositions made with those methods and/or materials.
Our '216B Patent expired in Europe in December 2009. We have been granted SPCs for the Avastin
®
, Herceptin
®
, Lucentis, Xolair
®
and Tysabri
®
products in many of the jurisdictions in the European Union in connection with the ‘216B Patent. The SPCs effectively extend our patent protection with respect to Avastin, Herceptin, Lucentis, Xolair and Tysabri generally until December 2014, except that the SPCs for Herceptin will generally expire in July 2014. Because SPCs are granted on a jurisdiction-by-jurisdiction basis, the duration of the extension varies slightly in certain jurisdictions. We may still be eligible for royalties notwithstanding the unavailability of SPC protection if the relevant royalty-bearing humanized antibody product is also made, used, sold or offered for sale in or imported from a jurisdiction in which we have an unexpired Queen et al. patent such as the United States.
Licensing Agreements
We have entered into licensing agreements under our Queen et al. patents with numerous entities that are independently developing or have developed humanized antibodies. We receive royalties on net sales of products that are made, used and/or sold prior to patent expiry. In general, these agreements cover antibodies targeting antigens specified in the license agreements. Under our licensing agreements, we are entitled to receive a flat-rate or tiered royalty rate based upon our licensees’ net sales of covered antibodies. Before August 15, 2013, we were entitled to a tiered royalty from one of our licensees, Genentech, based upon the net sales of covered antibodies. After August 15, 2013, all of the royalties received from Genentech have been based upon a flat-rate. We also expect to receive annual maintenance fees from licensees of our Queen et al. patents prior to patent expiry as well as periodic milestone payments. Total annual milestone payments in each of the last several years have been less than 1% of total revenue and we expect this trend will continue through the expiration of the Queen et al. patents.
Our total revenues from licensees under our Queen et al. patents were
$115.1 million
and
$143.6 million
net rebates and foreign exchange hedge adjustments for the
three months ended June 30, 2014
and 2013, respectively, and
$231.1 million
and
$235.5 million
for the
six months ended June 30, 2014
, and 2013, respectively.
Licensing Agreements for Marketed Products
In the
six months ended June 30, 2014
, we received royalties on sales of the nine humanized antibody products listed below, all of which are currently approved for use by the FDA and other regulatory agencies outside the United States.
|
|
|
|
Licensee
|
|
Product Names
|
Genentech
|
|
Avastin
®
|
|
|
Herceptin
®
|
|
|
Xolair
®
|
|
|
Lucentis
®
|
|
|
Perjeta
®
|
|
|
Kadcyla
®
|
|
|
|
Biogen Idec
1
|
|
Tysabri
®
|
|
|
|
Chugai
|
|
Actemra
®
|
|
|
|
Roche
|
|
Gazyva™
|
____________________
1
In April 2013, Biogen Idec completed its purchase of Elan's interest in Tysabri. Prior to this our licensee for Tysabri was identified as Elan.
On February 22, 2013, Genentech/Roche announced that the FDA approved Kadcyla for second line treatment of HER2-positive metastatic breast cancer and first line treatment for those patients who relapse within six months following adjuvant therapy. On November 20, 2013, Genentech/Roche announced EU approval for the treatment of adults with HER2-positive, inoperable locally advanced or metastatic breast cancer who previously received Herceptin and a taxane, separately or in combination. On September 20, 2013, Japan approved it for the same indication. PDL began receiving royalties in the second quarter of 2013 for the sales that occurred in the first quarter of 2013. Because Kadcyla is an antibody drug conjugate, i.e., made up of the antibody, trastuzumab, and the chemotherapy, DM1, joined together using a stable linker, it is a “combination product” under the terms of the license agreement and PDL will not receive royalties on that portion of the sales of the drug
attributable to the DM1.
On November 1, 2013, Genentech/Roche announced that Gazyva became the first therapy approved through the FDA’s breakthrough therapy designation, indicated in combination with chlorambucil to treat previously untreated chronic lymphocytic leukemia (CLL). PDL will begin receiving royalties in the first quarter of 2014 for the sales that occurred in the fourth quarter of 2013.
Genentech
We entered into a master patent license agreement, effective September 25, 1998, under which we granted Genentech a license under our Queen et al. patents to make, use and sell certain antibody products.
On January 31, 2014, we entered into a Settlement Agreement with Genentech and Roche which resolves all outstanding legal disputes between the parties, including our Nevada litigation with Genentech relating to an August 2010 facsimile sent by Genentech on behalf of Roche and Novartis asserting its products do not infringe on PDL’s SPCs, and our arbitration proceedings with Genentech related to the audit of royalties on sales.
Under the terms of the Settlement Agreement, effective retroactively to August 15, 2013, Genentech will pay a fixed royalty rate of 2.125 percent on worldwide sales of Avastin, Herceptin, Xolair, Perjeta and Kadcyla occurring on or before December 31, 2015, as compared to the previous tiered royalty rate in the U.S and the fixed rate on all ex-U.S.-based Manufacturing and Sales. Pursuant to the agreement, Genentech and Roche confirmed that Avastin, Herceptin, Lucentis, Xolair and Perjeta are licensed products as defined in the relevant license agreements between the parties, and further agreed that Kadcyla and Gazyva are licensed products. With respect to Lucentis, Genentech owes no royalties on U.S. sales occurring after June 30, 2013, and will pay a royalty of 2.125 percent on all ex-U.S.-based Sales occurring on or before December 28, 2014. The royalty term for Gazyva remains unchanged from the existing license agreement pertaining thereto.
The Settlement Agreement precludes Genentech and Roche from challenging the validity of PDL’s patents, including its SPCs in Europe, from contesting their obligation to pay royalties, from contesting patent coverage for Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla and Gazyva and from assisting or encouraging any third party in challenging PDL’s patents and SPCs. The Settlement Agreement further outlines the conduct of any audits initiated by PDL of the books and records of Genentech in an effort to ensure a full and fair audit procedure. Finally, the Settlement Agreement clarifies that the sales amounts from which the royalties are calculated does not include certain taxes and discounts.
The Settlement Agreement provides greater certainty for each of the parties in terms of the royalty rate payable under the agreement and the period over which they will be payable. PDL expects to recognize royalty revenue on the licensed products until the first quarter of 2016. Additionally, the settlement terms provide for a better definition of revenues and audit inspection procedures related to the arbitration dispute filed by PDL.
Based upon the flat royalty rate of 2.125 percent being retroactive to August 15, 2013, we received a one-time payment of net royalties due under the Settlement Agreement of $5.0 million, which was recognized as royalty revenue in the first quarter of 2014.
Until the August 15, 2013 effective date of the above Settlement Agreement, our license agreement with Genentech entitled us to royalties following the expiration of our patents with respect to sales of licensed product manufactured prior to patent expiry in jurisdictions providing patent protection. Our master patent license agreement with Genentech provided for a tiered royalty structure under which the royalty rate Genentech paid on royalty-bearing products sold in the United States or manufactured in the United States and used or sold anywhere in the world in a given calendar year decreased on incremental U.S.-based Sales above certain sales thresholds based on 95% of the underlying gross U.S.-based Sales. The net sales thresholds and the applicable royalty rates, prior to August 15, 2013, are outlined below:
|
|
|
|
Genentech Products Made or Sold in the U.S.
|
|
Royalty Rate
|
Net sales up to $1.5 billion
|
|
3.0%
|
Net sales between $1.5 billion and up to $2.5 billion
|
|
2.5%
|
Net sales between $2.5 billion and up to $4.0 billion
|
|
2.0%
|
Net sales exceeding $4.0 billion
|
|
1.0%
|
|
|
|
Genentech Products Made and Sold ex-U.S.
|
|
|
Net sales
|
|
3.0%
|
As a result of the tiered royalty structure, Genentech’s average annual royalty rate for a given year declined as Genentech’s U.S.-based Sales increased during that year. Because we receive royalties one quarter in arrears, the average royalty rates for the payments we received from Genentech for U.S.-based Sales in the second calendar quarter for Genentech’s sales from the first calendar quarter were higher than the average royalty rates for following quarters. The average royalty rates for payments we received from Genentech were generally lowest in the fourth and first calendar quarters for Genentech’s sales from the third and fourth calendar quarters when more of Genentech’s U.S.-based Sales bore royalties at the 1% royalty rate. As a result of the Settlement Agreement, the royalty rate of 2.125 percent will be consistent across all reporting periods in 2014. In 2013, the blended rate for the full year of royalties from Genentech Products was approximately 1.9%.
With respect to ex-U.S.-based Manufacturing and Sales, before August 15, 2013, the royalty rate that we received from Genentech was a fixed rate of 3.0% based on 95% of the underlying gross sales. The mix of U.S.-based Sales and ex-U.S.-based Manufacturing and Sales fluctuated.
The master patent license agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated: (i) by Genentech prior to such expiration upon sixty days written notice, (ii) by either party upon a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events.
On June 8, 2012, Genentech announced that the FDA approved Perjeta (pertuzumab). Perjeta is approved in combination with Herceptin and docetaxel chemotherapy for the treatment of people with HER2-postive metastatic breast cancer who have not received prior anti-HER2 therapy or chemotherapy for metastatic disease. PDL began receiving royalties generated from Perjeta during the quarter ended September 30, 2012.
On March 5, 2013, Genentech announced that Perjeta was approved by the European Medicines Agency in combination with Herceptin and docetaxel chemotherapy for the treatment of people with HER2-postive metastatic breast cancer who have not received prior anti-HER2 therapy or chemotherapy for metastatic disease.
On September 30, 2013, the FDA granted accelerated approval to
Perjeta in combination with Herceptin
and other chemotherapy for the treatment of HER2-positive, locally advanced, inflammatory or early stage breast cancer prior to surgery. Perjeta is the first drug approved in this setting.
On February 22, 2013, Genentech announced that the FDA approved Kadcyla for second line treatment of HER2-positive metastatic breast cancer and first line treatment for those patients who relapse within six months following adjuvant therapy.
On September 20, 2013, Japan approved it for the same indication. PDL began receiving royalties in the second quarter of 2013 for the sales that occurred in the first quarter of 2013. Because Kadcyla is an antibody drug conjugate, i.e., made up of the antibody, trastuzumab, and the chemotherapy, DM1, joined together using a stable linker, it is a “combination product” under the terms of the license agreement and PDL will not receive royalties on that portion of the sales of the drug attributable to the DM1. Also on November 20, 2013, Genentech/Roche announced EU approval for the treatment of adults with HER2-positive, inoperable locally advanced or metastatic breast cancer who previously received Herceptin and a taxane, separately or in combination.
On November 1, 2013, Genentech/Roche announced that Gazyva became the first therapy approved through the FDA’s breakthrough therapy designation, indicated in combination with chlorambucil to treat previously untreated chronic lymphocytic leukemia (CLL). PDL began receiving royalties in the first quarter of 2014 for the sales that occurred in the fourth quarter of 2013.
On July 29, 2014, Roche announced EU approval of Gazyva for the first line treatment of CLL with chlorambucil.
On March 6, 2014, Novartis reported that the EU had approved Xolair as an add-on therapy for chronic spontaneous idiopathic urticaria. On March 21, 2014, Genentech/Roche announced that the FDA had approved Xolair for chronic idiopathic urticaria. PDL expects to begin to receive royalties on this new indication in the third quarter of 2014 for the sales that occurred in the second quarter of 2014.
On August 6, 2014, Roche reported EU approval of Avastin for the treatment of ovarian cancer that is resistant to platinum-based chemotherapy.
On August 14, 2014, Genentech announced US approval of Avastin for the treatment of persistent, recurrent or metastatic cervical cancer
in combination with chemotherapy.
Biogen Idec
We entered into a patent license agreement, effective April 24, 1998, under which we granted to Elan a license under our Queen et al. patents to make, use and sell antibodies that bind to the cellular adhesion molecule α4 in patients with multiple sclerosis. Under the agreement, we are entitled to receive a flat royalty rate in the low single digits based on Elan’s net sales of the Tysabri product. Our license agreement with Elan entitles us to royalties following the expiration of our patents with respect to sales of licensed product manufactured prior to patent expiry in jurisdictions providing patent protection. The agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated: (i) by Elan prior to such expiration upon sixty days written notice, (ii) by either party upon a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events. In April 2013, Biogen Idec completed its purchase of Elan's interest in Tysabri. All obligations under our original patent license agreement with Elan have been assumed by Biogen Idec.
Chugai
We entered into a patent license agreement, effective May 18, 2000, with Chugai, a majority owned subsidiary of Roche, under which we granted to Chugai a license under our Queen et al. patents to make, use and sell antibodies that bind to interleukin-6 receptors to prevent inflammatory cascades involving multiple cell types for the treatment of rheumatoid arthritis. Under the agreement, we are entitled to receive a flat royalty rate in the low single digits based on net sales of the Actemra product manufactured in the U.S. prior to patent expiry. The agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated: (i) by Chugai prior to such expiration upon sixty days written notice, (ii) by either party upon a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events.
On October 21, 2013, Genentech/Roche announced approval of the subcutaneous formulation of Actemra in the U.S. On April 28, 2014, Roche announced approval of the subcutaneous formulation of Actemra in the EU.
Licensing Agreements for Non-Marketed Products
We have also entered into licensing agreements under which we have licensed certain rights under our Queen et al. patents to make, use and sell certain products that are not currently marketed. Certain of these development-stage products are currently in Phase 3 clinical trials. With respect to these agreements, we may receive payments based on certain development milestones and annual maintenance fees. We may also receive royalty payments if the licensed products receive marketing approval and are manufactured or generate sales before the expiration of our Queen et al. patents. For example, solanezumab is the Lilly licensed antibody for the treatment of Alzheimer's disease. If Lilly’s antibody for Alzheimer’s disease is approved, we would be entitled to receive a royalty based on a "know-how" license for technology provided in the design of this antibody. Unlike the royalty for the patent license, the two percent royalty payable for "know-how" runs for 12.5 years after the product's initial commercialization.
Depomed
On October 18, 2013, we entered into the Depomed Royalty Agreement, whereby we acquired the rights to receive royalties and milestones payable on sales of Type 2 diabetes products licensed by Depomed in exchange for a $240.5 million cash payment. As the licensor of certain patents, Depomed retains various rights, including the contractual right to audit its licensees and to ensure those licensees are complying with the terms of the underlying license agreement. Depomed retains full responsibility to protect and maintain the intellectual property rights underlying the licenses. In respect of the royalty stream relating to the Glumetza diabetes medication that we acquired from Depomed, which is the royalty right producing the highest revenues from the Depomed acquired royalties, U.S. patent protection for this product is expected to begin to expire in September 2016, and under settlement agreements to which Depomed is a party, certain manufacturers of generic products will be permitted to enter the market starting in February and August 2016.
VB
On June 26, 2014, PDL entered into the VB Royalty Agreement, whereby VB conveyed to the Company the right to receive royalties payable on sales of a PMA-approved spinal implant in exchange for a
$15.5 million
cash payment, less fees.
The royalty acquired includes royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company will receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company has received payments equal to two and three tenths times the cash payment made to VB, after which all rights to receive royalties will be returned to VB. VB may repurchase the royalty right at any time on or before June 26, 2018, for a specified amount. The acting chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement where negotiated separately.
Economic and Industry-wide Factors
Various economic and industry-wide factors are relevant to us and could affect our business, including changes to laws and interpretation of those laws that protect our intellectual property rights, our licensees ability to obtain or retain regulatory approval for products licensed under our patents, fluctuations in foreign currency exchange rates, the ability to attract, retain and integrate qualified personnel, as well as overall global economic conditions. We actively monitor economic, industry and market factors affecting our business; however, we cannot predict the impact such factors may have on our future results of operations, liquidity and cash flows. See also the “Risk Factors” section of this quarterly report for additional factors that may impact our business and results of operations.
Critical Accounting Policies and Uses of Estimates
Except as set forth below, during the
six months ended June 30, 2014
, there have been no significant changes to our critical accounting policies since those presented in Part II, Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2013
.
Royalty Rights - At Fair Value
We account for our royalty rights - at fair value at their estimated fair value. The estimated fair value of the royalty rights - at fair value is determined by using a discounted cash flow analysis related to the expected future cash flows to be received.
Generally these assets are classified as a Level 3 assets, as our valuation estimates utilize significant unobservable inputs, including estimates as to the probability and timing of future sales of the related products and discount rates applied to each cash flow in the asset. Related transaction fees and costs are expenses as incurred.
Realized and unrealized gains and losses from investments in royalty rights are presented together on the statement of income as a single component of revenue under the caption, “Royalty rights - change in fair value.”
We receive royalty payments based upon net sales of the covered products. Generally, under these agreements we receive royalty reports and payments approximately one month in arrears. We recognize royalty revenues when we can reliably estimate such amounts and collectability is reasonably assured.
Operating Results
Three and six
months ended
June 30, 2014
, compared to
three and six
months ended
June 30, 2013
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Three Months Ended
|
|
Change from Prior
|
|
Six Months Ended
|
|
Change from Prior
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
2013
|
|
Year %
|
|
2014
|
|
2013
|
|
Year %
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties from Queen et al. patents
|
|
$
|
115,066
|
|
|
$
|
143,617
|
|
|
(20)%
|
|
$
|
231,092
|
|
|
$
|
235,464
|
|
|
(2)%
|
Royalty rights - change in fair value
|
|
34,498
|
|
|
—
|
|
|
N/M
|
|
46,205
|
|
|
—
|
|
|
N/M
|
Interest revenue
|
|
12,613
|
|
|
4,903
|
|
|
157%
|
|
21,684
|
|
|
8,651
|
|
|
151%
|
License and other
|
|
575
|
|
|
—
|
|
|
N/M
|
|
575
|
|
|
—
|
|
|
N/M
|
Total revenues
|
|
$
|
162,752
|
|
|
$
|
148,520
|
|
|
10%
|
|
$
|
299,556
|
|
|
$
|
244,115
|
|
|
23%
|
__________________________
N/M = Not meaningful
Total revenues were
$162.8 million
and
$148.5 million
for the
three months ended June 30, 2014
, and
2013
, respectively, and
$299.6 million
and
$244.1 million
for the
six months ended June 30, 2014
and 2013. During the
three months ended June 30, 2014
, and 2013, our revenues consisted primarily of royalties and maintenance fees earned on sales of products under license agreements associated with our Queen et al. patents and interest revenue associated with our notes receivable debt financings to late stage healthcare companies, and during the
three months ended June 30, 2014
, royalty revenues also included
$34.5 million
in royalties associated with the royalties from U.S. sales of Glumetza and Janumet XR and change in fair value from our Depomed Royalty Agreement. Royalty revenue from Queen et al. patents is net of the payments made under our February 2011 settlement agreement with Novartis, which is based on a portion of the royalties that the company receives from Lucentis sales made by Novartis outside the United States. The amount paid is less than we receive in royalties on such sales.
Total revenues
increased
10%
for the
three months ended June 30, 2014
, when compared to the same period in
2013
, and
increased
23%
for the
six months ended June 30, 2014
, when compared to the same period in 2013. The growth is primarily driven by the addition of the royalty revenue and change in fair value from PDL's purchase of Depomed's diabetes-related royalties, increased royalties in the first two quarters of 2014 related to sales of Xolair, Kadcyla, Perjeta and Actemra, along with a higher fixed royalty rate in 2014 over the blended fixed and tiered 2013 rate, a first quarter of 2014 $5.0 million retroactive payment from Genentech related to our Settlement Agreement, and an increase in interest revenue from new debt financings to late stage healthcare companies as part of our strategy to acquire income generating assets.
While the Queen et al. licensed products' sales increased quarter over quarter, the decrease in royalty revenues is a result of the current fixed royalty rate of 2.125% on net sales of Avastin, Herceptin, Lucentis, Xolair, Perjeta and Kadcyla ("Genentech Products") in 2014 compared to the combination of tiered and fixed royalty rates applicable in the second quarter of 2013. Previously, Genentech Products that were made or sold in the United States were subject to tiered royalty rates dependent on aggregate net sales and Genentech Products both made and sold outside of the United States were subject to a fixed royalty rate of 3%.
The second quarter 2014 royalty payment received from Genentech was for worldwide net sales in the first quarter 2014. PDL’s second quarter royalty revenue was historically the highest amount of any quarter because the applicable tiered royalty rate was 3%. However, as aggregate net sales increased with each subsequent quarter, the tiered royalty rate declined, dropping to 1% in the third, fourth and first quarters. As a result, the blended royalty rate for all of 2013 for Genentech Products was 1.9%. A settlement with Genentech resulted in a single fixed royalty rate of 2.125%, which is greater than the annual blended royalty rate of 1.9% in 2013 and which will result in more uniform royalty revenue on a quarter-to-quarter basis in the current fiscal year. Thus, this decrease in royalties between the second quarters of 2013 and 2014 is solely a function of the transition to the new fixed royalty rate, which new royalty rate is anticipated to result in greater royalties to PDL when measured on an annual basis.
The following table summarizes the percentage of our total revenues earned from our licensees’ net product sales that individually accounted for 10% or more of our total revenues for the
three and six months ended June 30, 2014 and 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
June 30,
|
Licensee
|
|
Product Name
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Genentech
|
|
Avastin
|
|
24
|
%
|
|
31
|
%
|
|
27
|
%
|
|
33
|
%
|
|
|
Herceptin
|
|
24
|
%
|
|
32
|
%
|
|
25
|
%
|
|
32
|
%
|
|
|
Lucentis
|
|
10
|
%
|
|
20
|
%
|
|
11
|
%
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Biogen Idec
1
|
|
Tysabri
|
|
8
|
%
|
|
9
|
%
|
|
9
|
%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Depomed
|
|
Glumetza
|
|
16
|
%
|
|
0
|
%
|
|
13
|
%
|
|
0
|
%
|
__________________
1
In April 2013, Biogen Idec completed its purchase of Elan's interest in Tysabri. Prior to this our licensee for Tysabri was identified as Elan.
Foreign currency exchange rates also impact our reported revenues. More than 50% of our licensees’ product sales are in currencies other than U.S. dollars; as such, our revenues may fluctuate due to changes in foreign currency exchange rates and are subject to foreign currency exchange risk. While foreign currency conversion terms vary by license agreement, generally most agreements require that royalties first be calculated in the currency of sale and then converted into U.S. dollars using the average daily exchange rates for that currency for a specified period at the end of the calendar quarter. Accordingly, when the U.S. dollar weakens against other currencies, the converted amount is greater than it would have been had the U.S. dollar not weakened. For example, in a quarter in which we generate $70 million in royalty revenues, and when approximately $35 million is based on sales in currencies other than U.S. dollar, if the U.S. dollar strengthens across all currencies by ten percent during the conversion period for that quarter, when compared to the same amount of local currency royalties for the prior year, U.S. dollar converted royalties will be approximately $3.5 million less in the current quarter than in the prior year quarter.
For the
three and six months ended June 30, 2014 and 2013
, we hedged certain Euro-denominated currency exposures related to our licensees’ product sales with Euro forward contracts. We designate foreign currency exchange contracts used to hedge royalty revenues based on underlying Euro-denominated sales as cash flow hedges. The aggregate unrealized gain or loss, net of tax, on the effective portion of the hedge is recorded in stockholders’ equity as accumulated other comprehensive income (loss). Gains or losses on cash flow hedges are recognized as an adjustment to royalty revenue in the same period that the hedged transaction impacts earnings. For the
three months ended June 30, 2014
, and
2013
, as a result of our Euro forward contracts, we recognized
($3.1) million
and
$0.4 million
as additions/(reductions) in royalty revenues from our Euro contracts, respectively, and for the
six months ended June 30, 2014
, and 2013, we recognized
($4.2) million
and
($1.5) million
as additions/(reductions) in royalty revenues from our Euro contracts, respectively.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change from Prior
|
|
Six Months Ended
|
|
Change from Prior
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
2013
|
|
Year %
|
|
2014
|
|
2013
|
|
Year %
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
6,920
|
|
|
$
|
6,783
|
|
|
2%
|
|
$
|
11,502
|
|
|
$
|
13,969
|
|
|
(18)%
|
Percentage of total revenues
|
|
4
|
%
|
|
5
|
%
|
|
|
|
4
|
%
|
|
6
|
%
|
|
|
The increase in operating expenses for the three months ended June 30, 2014, as compared to the same period in 2013, was a result of an increase in general and administrative expenses of $1.0 million for professional services mostly related to the acquisition of other income related assets, $0.9 million for compensation, and $0.3 million for stock compensation, partially offset by a decrease in general and administrative expenses of $2.2 million related to legal expenses mostly related to litigation.
The decrease in operating expenses for the six months ended June 30, 2014, as compared to the same period in 2013, was a result of decrease in general and administrative expenses of $5.4 million related to legal expenses mostly related to litigation, partially offset by an increase in general and administrative expenses of $1.4 million for professional services mostly related to the acquisition of other revenue related assets and $1.2 million for compensation.
Non-operating Expense, Net
Non-operating expense, net, increased, in part, by the first quarter of 2014 loss on extinguishment of debt related to the Series 2012 Note partial extinguishment and the interest expense on the new February 2018 Notes. The increase in interest expense for the six months ended June 30, 2014, over the same period of 2013, consisted primarily of non-cash interest expense as we are required to compute interest expense using the interest rate for similar nonconvertible instruments in accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion.
Income Taxes
Income tax expense for the
three months ended June 30, 2014
and
2013
, was
$54.0 million
and
$42.0 million
, respectively, and for the
six months ended June 30, 2014
, and 2013, was
$96.7 million
and
$71.0 million
, respectively, which resulted primarily from applying the federal statutory income tax rate to income before income taxes. The increase in tax expense is primarily attributable to an increase in the Company's income before income taxes.
The uncertain tax position increased during the six months ended June 30, 2014, by
$5.8 million
from the estimated state tax liability as a result of increased revenues. We expect to release tax liabilities for uncertain tax positions related to federal tax credits taken on the 2009 income tax return in the third quarter of 2014 of approximately
$6.5 million
, which will result in a reduction to income tax expense.
Net Income per Share
Net income per share for the three and six months ended June 30, 2014, and
2013
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Net income per share - basic
|
$
|
0.57
|
|
|
$
|
0.67
|
|
|
$
|
1.06
|
|
|
$
|
1.05
|
|
Net income per share - diluted
|
$
|
0.52
|
|
|
$
|
0.62
|
|
|
$
|
0.94
|
|
|
$
|
0.96
|
|
The decrease in diluted net income per diluted share is primarily due to the increase in outstanding shares, partially offset by the increased revenues and the resulting increase in net income.
Liquidity and Capital Resources
We finance our operations primarily through royalty and other license related revenues, public and private placements of debt and equity securities and interest income on invested capital. We currently have fewer than ten employees managing our intellectual property, our licensing operations and other corporate activities as well as providing for certain essential reporting and management functions of a public company.
We had cash, cash equivalents and investments in the aggregate of
$217.8 million
and
$99.5 million
at
June 30, 2014
, and
December 31, 2013
, respectively. The
increase
was primarily attributable to net cash provided by the proceeds from the issuance of the February 2018 Notes of
$300.0 million
, proceeds from royalty rights of
$49.5 million
, proceeds from the issuance of warrants of
$11.4 million
, and cash generated by operating activities of
$146.2 million
, offset in part by cash advanced on notes receivable of
$215.0 million
, purchase of call options for
$31.0 million
, repurchase of a portion of the Series 2012 Notes for
$29.9 million
, payment of dividends of
$48.1 million
, repayment of a portion of the Term Loan of
$37.5 million
, purchase of royalty rights - at fair value of
$15.5 million
, and payment of debt issuance costs related to the February 2018 Note issuance of
$9.8 million
. We believe that cash from future revenues, net of operating expenses, debt service and income taxes, plus cash on hand, will be sufficient to fund our operations over the next several years. Although the last of our Queen et al. patents expire in December 2014, we expect to receive royalties beyond expiration based on the terms of our licenses. We do not expect to receive any meaningful royalty revenue from our Queen et al. patents beyond the first quarter of 2016.
We continuously evaluate alternatives to increase return for our stockholders by, for example, purchasing income generating assets, buying back our convertible notes, repurchasing our common stock, paying dividends and selling the Company. On
January 29, 2014
, our board of directors declared regular quarterly dividends of
$0.15
per share of common stock, payable on
March 12
,
June 12
,
September 12
and
December 12
of
2014
to stockholders of record on
March 5
,
June 5
,
September 5
and
December 5
of
2014
, the record dates for each of the dividend payments, respectively.
Notes and Other Long-term Receivables
Wellstat Diagnostics Note Receivable and Credit Agreement
In March 2012, the Company executed a
$7.5 million
two
-year senior secured note receivable with the holders of the equity interests in Wellstat Diagnostics. In addition to bearing interest at
10%
per annum, the note gave PDL certain rights to negotiate for certain future financing transactions. In August 2012, PDL and Wellstat Diagnostics amended the note receivable, providing a senior secured note receivable of
$10.0 million
, bearing interest at
12%
per annum, to replace the original
$7.5 million
note. This
$10.0 million
note was repaid on November 2, 2012, using the proceeds of the
$40.0 million
credit facility entered into with the Company on the same date.
On November 2, 2012, the Company and Wellstat Diagnostics entered into a
$40.0 million
credit agreement pursuant to which the Company is to accrue quarterly interest payments at the rate of
5%
per annum (payable in cash or in kind). In addition, PDL will receive quarterly royalty payments based on a low double digit royalty rate of Wellstat Diagnostics' net revenues, generated by the sale, distribution or other use of Wellstat Diagnostics' products, if any, commencing upon the commercialization of its products.
In January 2013, the Company was informed that, as of December 31, 2012, Wellstat Diagnostics had used funds contrary to the terms of the credit agreement and breached Sections 2.1.2 and 7 of the credit agreement. PDL sent Wellstat Diagnostics a notice of default on January 22, 2013, and accelerated the amounts owed under the credit agreement. In connection with the notice of default, PDL exercised one of its available remedies and transferred approximately
$8.1 million
of available cash from a bank account of Wellstat Diagnostics to PDL and applied the funds to amounts due under the credit agreement. On February 28, 2013, the parties entered into a forbearance agreement whereby PDL agreed to refrain from exercising additional remedies for
120 days
while Wellstat Diagnostics raised funds to capitalize the business and the parties attempted to negotiate a revised credit agreement. PDL agreed to provide up to
$7.9 million
to Wellstat Diagnostics to fund the business for the
120
-day forbearance period under the terms of the forbearance agreement. Following the conclusion of the forbearance period that ended on June 28, 2013, the Company agreed to forbear its exercise of remedies for additional periods of time to allow the owners and affiliates of Wellstat Diagnostics to complete a pending financing transaction. During such forbearance period, the Company provided approximately
$1.3 million
to Wellstat Diagnostics to fund ongoing operations of the business. During the year ended December 31, 2013, approximately
$8.7 million
was advanced pursuant to the forbearance agreement, and no further advances have been provided by the Company to Wellstat Diagnostics during the
six months ended
June 30, 2014
.
On August 15, 2013, the owners and affiliates of Wellstat Diagnostics completed a financing transaction to fulfill its obligations under the forbearance agreement. On August 15, 2013, the Company entered into an amended and restated credit agreement with Wellstat Diagnostics. The Company determined that the new agreement should be accounted for as a modification of the existing agreement.
Except as otherwise described here, the material terms of the amended and restated credit agreement are substantially the same as those of the original credit agreement, including quarterly interest payments at the rate of
5%
per annum (payable in cash or in kind). In addition, PDL will continue to receive quarterly royalty payments based on a low double digit royalty rate of Wellstat Diagnostics' net revenues. However, pursuant to the amended and restated credit agreement: (i) the principal amount was reset to approximately
$44.1 million
which was comprised of approximately
$33.7 million
original loan principal and interest,
$1.3 million
term loan principal and interest and
$9.1 million
forbearance principal and interest; (ii) the specified internal rates of return increased; (iii) the default interest rate was increased; (iv) Wellstat Diagnostics' obligation to provide certain financial information increased in frequency to monthly; (v) internal financial controls were strengthened by requiring Wellstat Diagnostics to maintain an independent, third-party financial professional with control over fund disbursements; (vi) the Company waived the existing events of default; and (vii) the owners and affiliates of Wellstat Diagnostics are required to contribute additional capital to Wellstat Diagnostics upon the sale of an affiliate entity. The amended and restated credit agreement continues to have an ultimate maturity date of December 31, 2021 (but may mature earlier upon certain specified events).
When the principal amount was reset, a
$2.5 million
reduction of the carrying value was recorded as a financing cost as a component of interest and other income, net. The new carrying value is lower as a function of the variable nature of the internal rate of return to be realized by the Company based on when the note is repaid. The internal rate of return calculation, although increased, was reset when the credit agreement was amended and restated.
In June of 2014, the Company received information from Wellstat Diagnostics that showed that it was generally unable to pay its debts as they became due. This constitutes an Event of Default under the amended and restated credit agreement. Wellstat Diagnostics entered into a transaction involving another lender, pursuant to which Wellstat Diagnostics obtained additional short term funding for its operations. At the same time, the Company entered into the First Amendment to Amended and Restated Credit Agreement with Wellstat Diagnostics. The material terms of the amendment include the following: (1) Wellstat Diagnostics acknowledged that an Event of Default had occurred, (2) the Company agreed to forbear from immediately enforcing its rights for up to sixty (60) days, so long as the other lender provided agreed levels of interim funding to Wellstat Diagnostics; and (3) the Company obtained specified additional information rights with regard to Wellstat Diagnostics’ financial matters and investment banking activities.
On August 5, 2014, the Company received notice that the short term funding being provided pursuant to the agreement with the other lender entered into during June 2014, was being terminated. Wellstat Diagnostics remained in default because it was still unable to pay its debts as they became due. Accordingly, the Company delivered a notice of default to Wellstat Diagnostics, due to, inter alia, its on-going failure to pay its debts as they become due and Wellstat Diagnostics’ failure to comply with certain covenants included in the First Amendment to Amended and Restated Credit Agreement by the deadlines to which the parties had agreed (the Borrower Notice). The Borrower Notice accelerates all obligations under the amended and restated credit agreement and demands immediate payment in full in an amount equal to
$53,939,820
, (which amount, in accordance with the terms of the amended and restated credit agreement, includes an amount that, together with interest and royalty payments already made to the Company, would generate a specified internal rate of return to the Company), plus accruing fees, costs and interest, and demands that Wellstat Diagnostics protect and preserve all collateral securing its obligations. On August 7, 2014, the Company delivered a notice to each of the guarantors of Wellstat Diagnostics’ obligations to the Company under the credit agreement (the Guarantor Notice). The Guarantor Notice includes a demand that the guarantors remit payment to the Company in the amount of the outstanding obligations. The guarantors include certain affiliates and related companies of Wellstat Diagnostics, as well as Wellstat Diagnostics’ shareholders. The Company is evaluating the remedies available to it at this time.
The amended and restated credit agreement is secured by a pledge of all of the assets of Wellstat Diagnostics, a pledge of all of Wellstat Diagnostics’ equity interests by the holders thereof, and a second lien on the assets of the affiliates of Wellstat Diagnostics.
At
June 30, 2014
, and December 31, 2013, the carrying value of the note was included in non-current assets.
As of
June 30, 2014
, the Company determined that its interest in Wellstat Diagnostics represented a variable interest in a Variable Interest Entity since Wellstat Diagnostics' equity was not sufficient to finance its operations without amounts advanced to it under the Company's note and forbearance agreement. However, the Company does not have the power to direct the
activities of Wellstat Diagnostics that most significantly impacts Wellstat Diagnostic's economic performance and is not the primary beneficiary of Wellstat Diagnostics; therefore, Wellstat Diagnostics is not subject to consolidation.
As of
June 30, 2014
, the carrying value of all amounts advanced to Wellstat Diagnostics including accrued interest through March 31, 2014, was
$50.2 million
, which was recorded in notes receivable. As of
June 30, 2014
, the maximum loss exposure was
$50.2 million
. As a result of the event of default, we ceased to accrued interest for the current period presented.
We believe that Wellstat Diagnostics does not currently have sufficient capital to execute its business plan over the long term. Wellstat Diagnostics recently raised
$2.5 million
and has informed the Company that Wellstat Diagnostics is continuing to consider other sources of financing and strategic alternatives.
The estimated fair value of the collateral is approximately
$50.2 million
. The estimated fair value of the collateral was determined by using a discounted cash flow analysis related to the underlying technology included in the collateral. The discounted cash flow was based upon expected income from sales of planned products over a period of
15 years
. The terminal value was estimated using selected market multiples based on sales and EBITDA.
Hyperion Agreement
On January 27, 2012, PDL and Hyperion entered into an agreement whereby Hyperion sold to PDL the royalty streams due from SDK related to a certain patent license agreement between Hyperion and SDK dated December 31, 2008. The agreement assigned the patent license agreement royalty stream accruing from January 1, 2012 through December 31, 2013 to PDL in exchange for the lump sum payment to Hyperion of
$2.3 million
. In exchange for the lump sum payment, PDL was to receive two equal payments of $1.2 million on both March 5, 2013 and March 5, 2014. The first payment of
$1.2 million
was paid on March 5, 2013. The second and final payment of
$1.2 million
was due on March 5, 2014. Hyperion has not made the payment due on March 5, 2014. The Company completed an impairment analysis as of June 30, 2014. The estimated fair value of the collateral was determined to be in excess of that of the carrying value. Hyperion is considering other sources of financing and strategic alternatives, including selling the company. Depending on the outcome of its efforts and PDL's assessment of Hyperion's financial viability, we may recognize an impairment in a future period.
Merus Labs Note Receivable and Credit Agreement
In July 2012, PDL loaned
$35.0 million
to Merus Labs in connection with its acquisition of a commercial-stage pharmaceutical product and related assets. In addition, PDL agreed to provide a
$20.0 million
letter of credit on behalf of Merus Labs for the seller of the assets to draw upon to satisfy the remaining
$20.0 million
purchase price obligation. The seller made this draw on the letter of credit in July 2013 and an additional loan to Merus Labs for
$20.0 million
was recorded for an aggregate of
$55.0 million
in total borrowings.
Outstanding borrowings under the July 2012 loan bore interest at the rate of
13.5%
per annum and outstanding borrowings as a result of the draw on the letter of credit bore interest at the rate of
14.0%
per annum. Merus Labs was required to make four periodic principal payments in respect of the July 2012 loan, with repayment of the remaining principal balance of all loans due on March 31, 2015. The borrowings were subject to mandatory prepayments upon certain asset dispositions or debt issuances as set forth in the credit agreement. Merus Labs made the first of these payments in December 2012 in the amount of
$5.0 million
, and made the second payment in June 2013 in the amount of
$7.5 million
.
In September 2013, Merus Labs prepaid in full its obligations under the credit agreement, including accrued interest through the payment date and a prepayment fee of
1%
of the aggregate principal amount outstanding at the time of repayment. There was
no
outstanding balance owed as of
June 30, 2014
.
AxoGen Note Receivable and AxoGen Royalty Agreement
In October 2012, PDL entered into the AxoGen Royalty Agreement with AxoGen pursuant to which the Company will receive specified royalties on AxoGen’s net revenues (as defined in the AxoGen Royalty Agreement) generated by the sale, distribution or other use of AxoGen’s products. The AxoGen Royalty Agreement has an
eight
year term and provides PDL with royalties of
9.95%
based on AxoGen's net revenues, subject to agreed-upon guaranteed quarterly minimum payments of approximately
$1.3
to
$2.5 million
beginning in the fourth quarter of 2014, and the right to require AxoGen to repurchase the AxoGen Royalty Agreement at the end of the fourth year. AxoGen has been granted certain rights to call the contract in years five through
eight
. The total consideration PDL paid to AxoGen for the royalty rights was
$20.8 million
, including an interim funding of
$1.8 million
in August 2012. AxoGen was required to use a portion of the proceeds from the AxoGen Royalty Agreement to pay the
outstanding balance under its existing credit facility. AxoGen plans to use the remainder of the proceeds to support the business plan for its products. The royalty rights are secured by the cash and accounts receivable of AxoGen.
Under the AxoGen Royalty Agreement, beginning on October 1, 2016, or in the event of the occurrence of a material adverse event, AxoGen's bankruptcy or material breach of the AxoGen Royalty Agreement, the Company may require AxoGen to repurchase the royalty rights at a price that, together with payments already made by AxoGen, would generate a specified internal rate of return to the Company. The Company has concluded that the repurchase option is an embedded derivative which should be bifurcated and separately accounted for at fair value.
In the event of a change of control, AxoGen must repurchase the assigned interests from the Company for a repurchase price equal to an amount that, together with payments already made by AxoGen, would generate a
32.5%
internal rate of return to the Company. The Company has concluded that the change of control provision is an embedded derivative that should be bifurcated and separately recorded at its estimated fair value. The estimated fair value of the change of control provision was approximately
$1.2 million
and
$1.1 million
as of
June 30, 2014
, and
December 31, 2013
, respectively. The estimated fair value of this embedded derivative is included in the carrying value of the AxoGen note receivable. The Company recognized gains of approximately
$0.1 million
and
$0.4 million
related to the change in the estimated fair value of embedded derivative during the three month periods ended
June 30, 2014
and 2013, respectively. The Company recognized approximately
$0.1 million
and
$0.4 million
related to the change in the estimated fair value of the embedded derivative during the
six months ended June 30, 2014
and 2013, respectively.
At any time after September 30, 2016, AxoGen, at its option, can repurchase the assigned interests under the AxoGen Royalty Agreement for a price applicable in a change of control.
During the term of the AxoGen Royalty Agreement, the Company is entitled to designate an individual to be a member of AxoGen's board of directors. The Company has exercised this right and on October 5, 2012, upon the close of the transaction, the Company's President and Chief Executive Officer was elected to AxoGen's board of directors.
On August 14, 2013, PDL purchased
1,166,666
shares of AXGN at
$3.00
per share, totaling
$3.5 million
. The shares are classified as available for sale and recorded as short term investments on the balance sheet. As of
June 30, 2014
, the shares were valued at
$3.2 million
, which result in an unrealized loss of
$0.3 million
which is recorded in other comprehensive loss.
Avinger Note Receivable and Royalty Agreement
On April 18, 2013, PDL entered into a credit agreement with Avinger, under which we made available to Avinger up to
$40.0 million
to be used by Avinger in connection with the commercialization of its lumivascular catheter devices and the development of Avinger's lumivascular atherectomy device. Of the
$40.0 million
initially available to Avinger, we funded an initial
$20.0 million
, net of fees, at the close of the transaction. The additional
$20.0 million
in the form of a second tranche is no longer available to Avinger. Outstanding borrowings under the initial loan bear interest at a stated rate of
12%
per annum.
Avinger is required to make quarterly interest and principal payments. Principal repayment will commence on: (i) the eleventh interest payment date if the revenue milestone is not achieved or (ii) the thirteenth interest payment date if the revenue milestone is achieved. The principal amount outstanding at commencement of repayment, after taking into account any payment-in-kind, will be repaid in equal installments until final maturity of the loans. The loans will mature in April 2018.
In connection with entering into the credit agreement, the Company will receive a low, single-digit royalty on Avinger's net revenues through April 2018. Avinger may prepay the outstanding principal and accrued interest on the notes receivable at any time. If Avinger repays the notes receivable prior to April 2018, the royalty on Avinger's net revenues will be reduced by
50%
and will be subject to certain minimum payments from the prepayment date through April 2018.
The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Avinger and any of its subsidiaries (other than controlled foreign corporations, if any). The credit agreement provides for a number of standard events of default, including payment, bankruptcy, covenant, representation and warranty and judgment defaults.
LENSAR Credit Agreement
On October 1, 2013, PDL entered into a credit agreement with LENSAR, under which PDL made available to LENSAR up to
$60 million
to be used by LENSAR in connection with the commercialization of its currently marketed LENSAR™ Laser System. Of the
$60 million
available to LENSAR, an initial
$40 million
, net of fees, was funded by the Company at the close of the transaction. Upon attainment by LENSAR of a specified sales milestone to be accomplished no later than September 30,
2014, PDL will fund LENSAR an additional
$20 million
. Outstanding borrowings under the loans bear interest at the rate of
15.5%
per annum, payable quarterly in arrears.
Principal repayment will commence on the thirteenth interest payment date or December 31, 2016. The principal amount outstanding at the commencement of repayment will be repaid in equal installments until final maturity of the loans. The loans will mature on October 1, 2018. LENSAR may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The loans are secured by all of the assets of LENSAR.
Durata Credit Agreement
On October 31, 2013, PDL entered into a credit agreement with Durata, under which the Company made available to Durata up to
$70.0 million
. Of the
$70.0 million
available to Durata, an initial
$25.0 million
(tranche one), net of fees, was funded by the Company at the close of the transaction. On May 27, 2014, the Company funded Durata an additional $15 million (tranche two) as a result of Durata's marketing approval of dalbavancin in the United States, which occurred on May 23, 2014, and was the milestone needed to receive the tranche two funding. Within 9 months after the occurrence of the tranche two milestone, Durata may request up to a single additional
$30 million
borrowing. Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bore interest at the rate of
14.0%
per annum, payable quarterly in arrears. Upon occurrence of the tranche two milestone, the interest rate of the loans decreased to
12.75%
.
Principal repayment will commence on the fifth interest payment date, March 31, 2015. The principal amount outstanding will be repaid quarterly over the remainder of the loans in an increasing percentage of the principal outstanding at commencement of repayment. The loans will mature on October 31, 2018. Durata may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The Company is entitled to receive a fee in addition to the prepayment penalty in the event that Durata undergoes a change in control. The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Durata.
Direct Flow Credit Agreement
On November 5, 2013, PDL entered into a credit agreement with Direct Flow Medical, which PDL will provide up to
$50.0 million
to Direct Flow Medical. Of the
$50.0 million
available to Direct Flow Medical, an initial
$35.0 million
(tranche one), net of fees, was funded by the Company at the close of the transaction. Upon the attainment of a specified revenue milestone to be accomplished no later than December 31, 2014 (the tranche two milestone), the Company will fund Direct Flow Medical an additional
$15.0 million
, net of fees. Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bear interest at the rate of
15.5%
per annum, payable quarterly in arrears. Upon occurrence of the tranche two milestone, the interest rate of the loans will decrease to
13.5%
.
Principal repayment will commence on the twelfth interest payment date, September 30, 2016. The principal amount outstanding at commencement of repayment will be repaid in equal installments until final maturity of the loans. The loans will mature on November 5, 2018. Direct Flow Medical may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The obligations under the credit agreement are secured by a pledge of substantially all of the assets of Direct Flow Medical and any of its subsidiaries.
Paradigm Spine Credit Agreement
On February 14, 2014, the Company entered into a credit agreement with Paradigm Spine, under which it made available to Paradigm Spine up to $75.0 million to be used by Paradigm Spine to refinance its existing credit facility and expand its domestic commercial operations. Of the $75.0 million available to Paradigm Spine, an initial $50 million, net of fees, was funded by the Company at the close of the transaction. Upon the attainment of specified sales and other milestones before December 31, 2014, the Company will fund Paradigm Spine between an additional $6.25 million and $12.5 million, at Paradigm Spine’s discretion. Upon the attainment of specified sales and other milestones before June 30, 2015, the Company will fund Paradigm Spine up to an additional $12.5 million, also at Paradigm Spine’s discretion. Borrowings under the credit agreement bear interest at the rate of 13.0% per annum, payable quarterly in arrears.
Principal repayment will commence on the twelfth interest payment date, December 31, 2016. The principal amount outstanding at commencement of repayment will be repaid in equal installments until final maturity of the loans. The loans will mature on February 14, 2019, or, if Paradigm Spine has achieved the first milestone and the additional loan amount is provided to Paradigm Spine, the loans will mature on August 14, 2019. Paradigm Spine may elect to prepay the loans at any time, subject to a prepayment penalty that decreases over the life of the loans. The obligations under the credit agreement are secured
by a pledge of substantially all of the assets of Paradigm Spine and its domestic subsidiaries and, initially, certain assets of Paradigm Spine’s German subsidiaries.
kaléo Note Purchase Agreement
On April 1, 2014, PDL entered into a note purchase agreement with Accel 300, a wholly-owned subsidiary of kaléo, pursuant to which the Company acquired
$150 million
of secured notes due 2029. The secured notes were issued pursuant to an indenture between Accel 300 and U.S. Bank, National Association, as trustee, and are secured by
100 percent
of the royalties from kaléo’s first approved product, Auvi-Q™ (epinephrine auto-injection, USP) (known as Allerject in Canada),
10 percent
of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection) (collectively, the "Revenue Interests"), and by a pledge of kaléo’s equity ownership in Accel 300.
The secured notes bear interest at
13 percent
per annum, paid quarterly in arrears on principal outstanding. The principal balance of the secured notes is repaid to the extent that the Revenue Interests exceed the quarterly interest payment, as limited by a quarterly payment cap. The final maturity of the secured notes is March 2029. kaléo may redeem the secured notes at any time, subject to a redemption premium.
Royalty Rights - At Fair Value
Depomed Royalty Agreement
On October 18, 2013, PDL entered into the Depomed Royalty Agreement, whereby the Company acquired the rights to receive royalties and milestones payable on sales of Type 2 diabetes products licensed by Depomed in exchange for a
$240.5 million
cash payment. Total arrangement consideration was $241.3 million, which was comprised of the $240.5 million cash payment to Depomed and $0.8 million in transaction costs.
The rights acquired include Depomed’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck with respect to sales of Janumet® XR (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica with respect to potential future development milestones and sales of its investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Depomed’s license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences and Valeant Pharmaceuticals for sales of extended-release metformin in Korea and Canada, respectively.
Under the terms of the Depomed Royalty Agreement, the Company will receive all royalty and milestone payments due under license agreements between Depomed and its licensees until the Company has received payments equal to two times the cash payment it made to Depomed, after which all net payments received by Depomed will be shared evenly between the Company and Depomed.
The Depomed Royalty Agreement terminates on the third anniversary following the date upon which the later of the following occurs: (a) October 25, 2021, or (b) at such time as no royalty payments remain payable under any license agreement and each of the license agreements has expired by its terms.
As of June 30, 2014, and December 31, 2013, the Company determined that its royalty purchase interest in Depo DR Sub represented a variable interest in a variable interest entity since the equity in Depo DR Sub was not sufficient to finance its operations without additional financing. However, the Company does not have the power to direct the activities of Depo DR Sub that most significantly impact Depo DR Sub's economic performance and is not the primary beneficiary of Depo DR Sub; therefore, Depo DR Sub is not subject to consolidation by the Company.
The asset acquired represents a single unit of accounting. The fair value of the assets acquired was determined by using a discounted cash flow analysis related to the expected future cash flows to be generated by each licensed product. The asset is classified as a Level 3 assets with the fair value hierarchy, as our valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future commercialization for products not yet approved by the FDA or other regulatory agencies. The discounted cash flow was based upon expected royalties from sales of licensed products over a nine year period. The discount rates utilized ranged from approximately
21%
to
25%
. Significant judgment is required in selecting appropriate discount rates. Should these discount rates increase or decrease by 5%, the fair value of the asset could decrease by $22.3 million or increase by $28.2 million, respectively. A third-party expert was engaged to help management develop its estimate of the expected future cash flows. The fair value of the asset is subject to variation should those cash flows vary
significantly from those estimates. An evaluation of those estimates, discount rates utilized and general market conditions effecting fair market value will be performed in each reporting period.
VB Royalty Agreement
On June 26, 2014, PDL entered into the VB Royalty Agreement, whereby VB conveyed to the Company the right to receive royalties payable on sales of a PMA-approved spinal implant in exchange for a
$15.5 million
cash payment, less fees.
The royalty acquired includes royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company will receive all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until the Company has received payments equal to two and three tenths times the cash payment made to VB, after which all rights to receive royalties will be returned to VB. VB may repurchase the royalty right at any time on or before June 26, 2018, for a specified amount. The acting chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement where negotiated separately.
The fair value of the royalty right at June 30, 2014, was determined by using a discounted cash flow analysis related to the expected future cash flows to be received. This asset is classified as a Level 3 asset, as our valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future sales of the licensed product. The discounted cash flow was based upon expected royalties from sales of licensed product over a nine year period. The discount rate utilized was approximately
17.5%
. Significant judgment is required in selecting the appropriate discount rate.
Should this discount rate increase or decrease by 2.5%, the fair value of this asset could decrease by $1.4 million or increase by $1.7 million, respectively.
A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows. The fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. An evaluation of those estimates, discount rates utilized and general market conditions effecting fair market value will be performed in each reporting period.
Convertible Notes
Series 2012 Notes
In January 2012, we exchanged
$169.0 million
aggregate principal of new Series 2012 Notes for an identical principal amount of our February 2015 Notes, plus a cash payment of
$5.00
for each
$1,000
principal amount tendered, totaling approximately
$845,000
. The cash incentive payment was allocated to deferred issue costs of
$765,000
, additional paid-in capital of
$52,000
and deferred tax assets of
$28,000
. The deferred issue costs will be recognized over the life of the Series 2012 Notes as interest expense. In February 2012, we entered into separate privately negotiated exchange agreements under which we exchanged an additional
$10.0 million
aggregate principal amount of the new Series 2012 Notes for an identical principal amount of our February 2015 Notes. In August 2013, the Company entered into a separate privately negotiated exchange agreement under which it retired the final $1.0 million aggregate principal amount of the Company's outstanding February 2015 Notes. Pursuant to the exchange agreement, the holder of the February 2015 Notes received
$1.0 million
aggregate principal amount of the Company's Series 2012 Notes. Immediately following the exchange,
no
principal amount of the February 2015 Notes remained outstanding and
$180.0 million
principal amount of the Series 2012 Notes was outstanding.
On February 6, 2014, the Company entered into exchange agreements and purchase agreements with certain holders of approximately
$131.7 million
aggregate principal amount of outstanding Series 2012 Notes. The exchange agreements provided for the issuance by the Company of shares of common stock and a cash payment for the Series 2012 Notes being exchanged, and the purchase agreements provided for a cash payment for the Series 2012 Notes being repurchased. The total consideration given was approximately
$191.8 million
. The Company issued to the participating holders of the February 2015 Notes, a total of approximately
20.3 million
shares of its common stock with a fair value of approximately
$157.6 million
and made an aggregate cash payment of approximately
$34.2 million
pursuant to the exchange and purchase agreements. Of the $34.2 million cash payment, $2.5 million is attributable to an inducement fee, $1.8 million is attributable to interest accrued through the date of settlement and $29.9 million is attributable to the repurchase of the Series 2012 Notes. It was determined that the exchange and purchase agreement represented an extinguishment of the related notes. As a result, a loss on extinguishment of
$6.1 million
was recorded. The
$6.1 million
loss on extinguishment included the derecognition of the original issuance discount of
$5.8 million
and a
$0.3 million
charge resulting from the difference of the face value of the notes and the fair value of the notes. Immediately following the exchange,
$48.3 million
principal amount of the Series 2012 Notes was outstanding with approximately
$2.1 million
of remaining original issuance discount to be amortized over the remaining life of the Series 2012 Notes.
The terms of the Series 2012 Notes are governed by the indenture dated as of January 5, 2012, and include a net share settlement feature, meaning that if a conversion occurs, the principal amount will be settled in cash and the excess, if any, will be settled in the Company’s common stock. The Series 2012 Notes may not be redeemed by the Company prior to their stated maturity date. Our Series 2012 Notes are due February 15, 2015, and bear interest at a rate of
2.875%
per annum, payable semi-annually in arrears on February 15 and August 15 of each year.
Holders may convert their Series 2012 Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date of the Series 2012 Notes under the following circumstances:
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During any fiscal quarter commencing after the fiscal quarter ending December 31, 2011, if the closing price of the Company’s common stock for at least
20
trading days in a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130%
of the conversion price for the Series 2012 Notes on the last day of such preceding fiscal quarter;
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During the
five
business-day period immediately after any
five
consecutive trading-day period in which the trading price per
$1,000
principal amount of the Series 2012 Notes for each trading day of that measurement period was less than
98%
of the product of the closing price of the Company’s common stock and the conversion rate for the Series 2012 Notes for that trading day;
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Upon the occurrence of certain corporate transactions as provided in the indenture; or
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Anytime, at the holder’s option, beginning on August 15, 2014.
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Holders of our Series 2012 Notes who convert their Series 2012 Notes in connection with a fundamental change resulting in the
reclassification, conversion, exchange or cancellation of our common stock may be entitled to a make-whole premium in the form of an increase in the conversion rate. Such fundamental change is generally defined to include a merger involving PDL, an acquisition of a majority of PDL’s outstanding common stock and a change of a majority of PDL’s board of directors without the approval of the board of directors.
We allocated
$2.3 million
of the remaining deferred February 2015 Notes original issue discount as of the date of the exchange to the Series 2012 Notes based on the percentage of the February 2015 Notes exchanged. In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we were required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, we separated the principal balance of the Series 2012 Notes, net of the allocated original issue discount, between the fair value of the debt component and the common stock conversion feature. Using an assumed borrowing rate of
7.3%
, which represents the estimated market interest rate for a similar nonconvertible instrument available to us during the period of the exchange transactions, we recorded a total debt discount of
$16.8 million
, allocated
$10.9 million
to additional paid-in capital and
$5.9 million
to deferred tax liability. The discount is being amortized to interest expense over the term of the Series 2012 Notes and increases interest expense during the term of the Series 2012 Notes from the
2.875%
cash coupon interest rate to an effective interest rate of
7.3%
. The common stock conversion feature is recorded as a component of stockholders’ deficit.
As of
August 18, 2014
, we have not received notices for the conversion of the Series 2012 Notes. If we do receive any conversion notices they would be net settled in cash and the excess, if any, will be settled in the Company's common stock. We do not expect the current capital market conditions and credit environment to create incentives for note holders to convert their notes, however, there can be no assurance that our holders will not request conversion. If the full
$48.3 million
in aggregate convertible debt was called for conversion prior to
June 30, 2014
, given our current cash and cash equivalents balance, we would have sufficient unrestricted cash and cash equivalents on hand to satisfy the conversion without additional liquidity. We may also consider restructuring our obligations under the convertible debt, or raising additional cash through sales of investments, assets or common stock, or from borrowings to fund this conversion.
May 2015 Notes
On May 16, 2011, we issued
$155.3 million
in aggregate principal amount, at par, of our May 2015 Notes in an underwritten public offering, for net proceeds of
$149.7 million
. Our May 2015 Notes are due May 1, 2015, and we pay interest at
3.75%
on our May 2015 Notes semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2011. Proceeds from our May 2015 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem our 2012 Notes. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require PDL to repurchase their May 2015 Notes at a purchase price equal to
100%
of the principal, plus accrued interest.
Our May 2015 Notes are convertible under any of the following circumstances:
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During any fiscal quarter ending after the quarter ending June 30, 2011, if the last reported sale price of our common stock for at least
20
trading days in a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130%
of the conversion price for the notes on the last day of such preceding fiscal quarter;
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During the
five
business-day period immediately after any
five
consecutive trading-day period, which we refer to as the measurement period, in which the trading price per
$1,000
principal amount of notes for each trading day of that measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate for the notes for each such day;
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Upon the occurrence of specified corporate events as described further in the indenture; or
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At any time on or after November 1, 2014.
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In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we were required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, we separated the principal balance of our May 2015 Notes between the fair value of the debt component and the fair value of the common stock conversion feature. Using an assumed borrowing rate of
7.5%
, which represents the estimated market interest rate for a similar nonconvertible instrument available to us on the date of issuance, we recorded a total debt discount of
$18.9 million
, allocated
$12.3 million
to additional paid-in capital and allocated
$6.6 million
to deferred tax liability. The discount is being amortized to interest expense over the term of our May 2015 Notes and increases interest expense during the term of our May 2015 Notes from the
3.75%
cash coupon interest rate to an effective interest rate of
7.5%
. As of
June 30, 2014
, the remaining discount amortization period is
0.8 years
.
Purchased Call Options and Warrants
In connection with the issuance of our May 2015 Notes, we entered into purchased call option transactions with
two
hedge counterparties. We paid an aggregate amount of
$20.8 million
, plus legal fees, for the purchased call options with terms substantially similar to the embedded conversion options in our May 2015 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in our May 2015 Notes, approximately
25.7 million
shares of our common stock. We may exercise the purchased call options upon conversion of our May 2015 Notes and require the hedge counterparty to deliver shares to the Company in an amount equal to the shares required to be delivered by the Company to the note holder for the excess conversion value. The purchased call options expire on May 1, 2015, or the last day any of our May 2015 Notes remain outstanding.
In addition, we sold to the hedge counterparties warrants exercisable, on a cashless basis, for the sale of rights to receive up to
27.5 million
shares of common stock underlying our May 2015 Notes. We received an aggregate amount of
$10.9 million
for the sale from the two counterparties. The warrant counterparties may exercise the warrants on their specified expiration dates that occur over a period of time ending on January 20, 2016. If the VWAP of our common stock, as defined in the warrants, exceeds the strike price of the warrants on the date of conversion, we will deliver to the warrant counterparties shares equal to the spread between the VWAP on the date of exercise or expiration and the strike price. If the VWAP is less than the strike price, neither party is obligated to deliver anything to the other.
The purchased call option transactions and warrant sales effectively serve to reduce the potential dilution associated with conversion of our May 2015 Notes. The strike prices are approximately
$6.04
and
$7.11
, subject to further adjustment upon certain events including dividend payments, for the purchased call options and warrants, respectively.
If the share price is above
$6.04
, but below
$7.11
, upon conversion of our May 2015 Notes, the purchased call options will offset the share dilution, because the Company will receive shares on exercise of the purchased call options equal to the shares that the Company must deliver to the note holders. If the share price is above
$7.11
, upon exercise of the warrants, the Company will deliver shares to the counterparties in an amount equal to the excess of the share price over
$7.11
. For example, a 10% increase in the share price above
$7.11
would result in the issuance of
2.0 million
incremental shares upon exercise of the warrants. If our share price increases, additional dilution would occur.
While the purchased call options are expected to reduce the potential equity dilution upon conversion of our May 2015 Notes, prior to conversion or exercise, our May 2015 Notes and the warrants could have a dilutive effect on the Company’s earnings
per share to the extent that the price of the Company’s common stock during a given measurement period exceeds the respective exercise prices of those instruments. As of
June 30, 2014
, and
December 31, 2013
, the market price condition for convertibility of our May 2015 Notes was not met and there were no related purchased call options or warrants exercised.
The purchased call options and warrants are considered indexed to PDL stock, require net-share settlement and met all criteria for equity classification at inception and at
June 30, 2014
, and
December 31, 2013
. The purchased call options cost, including legal fees, of
$20.8 million
, less deferred taxes of
$7.2 million
and the
$10.9 million
received for the warrants, was recorded as adjustments to additional paid-in capital. Subsequent changes in fair value will not be recognized as long as the purchased call options and warrants continue to meet the criteria for equity classification.
February 2018 Notes
On February 12, 2014, we issued $300 million in aggregate principal amount, at par, of our February 2018 Notes in an underwritten public offering, for net proceeds of $290.2 million. Our February 2018 Notes are due February 1, 2018, and we pay interest at 4.0% on our February 2018 Notes semiannually in arrears on February 1 and August 1 of each year, beginning August 1, 2014. A portion of the proceeds from our February 2018 Notes, net of amounts used for purchased call option transactions and provided by the warrant transactions described below, were used to redeem $131.7 million of our Series 2012 Notes. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require PDL to repurchase their February 2018 Notes at a purchase price equal to
100%
of the principal, plus accrued interest.
Our February 2018 Notes are convertible under any of the following circumstances:
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During any fiscal quarter ending after the quarter ending June 30, 2014, if the last reported sale price of our common stock for at least
20
trading days in a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130%
of the conversion price for the notes on the last day of such preceding fiscal quarter;
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During the
five
business-day period immediately after any
five
consecutive trading-day period, which we refer to as the measurement period, in which the trading price per
$1,000
principal amount of notes for each trading day of that measurement period was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate for the notes for each such day;
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Upon the occurrence of specified corporate events as described further in the indenture; or
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At any time on or after August 1, 2017.
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The initial conversion rate for the February 2018 Notes is 109.1048 shares of Company common stock per $1,000 principal amount of February 2018 Notes, which is equivalent to an initial conversion price of approximately $9.17 per share of common stock, subject to adjustments upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company will be required to pay cash and, if applicable, deliver shares of Company common stock as described in the Indenture.
In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we were required to separately account for the liability component of the instrument in a manner that reflects the market interest rate for a similar nonconvertible instrument at the date of issuance. As a result, we separated the principal balance of our February 2018 Notes between the fair value of the debt component and the fair value of the common stock conversion feature. Using an assumed borrowing rate of 7.0% which represents the estimated market interest rate for a similar nonconvertible instrument available to us on the date of issuance, we recorded a total debt discount of $29.7 million, allocated $19.3 million to additional paid-in capital and allocated $10.4 million to deferred tax liability. The discount is being amortized to interest expense over the term of our February 2018 Notes and increases interest expense during the term of our February 2018 Notes from the 4.0% cash coupon interest rate to an effective interest rate of 6.9%. As of
June 30, 2014
, the remaining discount amortization period is
3.6 years
.
Purchased Call Options and Warrants
In connection with the issuance of our February 2018 Notes, we entered into purchased call option transactions with
two
hedge counterparties. We paid an aggregate amount of $31.0 million for the purchased call options with terms substantially similar to the embedded conversion options in our February 2018 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in our February 2018 Notes, approximately
32.7 million
shares of our common stock. We may exercise the purchased call options upon conversion of our February 2018 Notes and
require the hedge counterparty to deliver shares to the Company in an amount equal to the shares required to be delivered by the Company to the note holder for the excess conversion value. The purchased call options expire on February 1, 2018, or the last day any of our February 2018 Notes remain outstanding.
In addition, we sold to the hedge counterparties warrants exercisable, on a cashless basis, for the sale of rights to receive shares of common stock that will initially underlie our February 2018 Notes at a strike price of $10.3610 per share, which represents a premium of approximately 30% over the last reported sale price of the Company's common stock of $7.97 on February 6, 2014. The warrant transactions could have a dilutive effect to the extent that the market price of the Company's common stock exceeds the applicable strike price of the warrants on the date of conversion. We received an aggregate amount of $11.4 million for the sale from the two counterparties. The warrant counterparties may exercise the warrants on their specified expiration dates that occur over a period of time. If the VWAP of our common stock, as defined in the warrants, exceeds the strike price of the warrants, we will deliver to the warrant counterparties shares equal to the spread between the VWAP on the date of exercise or expiration and the strike price. If the VWAP is less than the strike price, neither party is obligated to deliver anything to the other.
The purchased call option transactions and warrant sales effectively serve to reduce the potential dilution associated with conversion of our February 2018 Notes. The strike prices is subject to further adjustment in the event that future quarterly dividends exceed $0.15 per share.
The purchased call options and warrants are considered indexed to PDL stock, require net-share settlement and met all criteria for equity classification at inception and at
June 30, 2014
. The purchased call options cost of $31.0 million, less deferred taxes of $10.8 million, and the $11.4 million received for the warrants, were recorded as adjustments to additional paid-in capital. Subsequent changes in fair value will not be recognized as long as the purchased call options and warrants continue to meet the criteria for equity classification.
Term Loan
On October 28, 2013, PDL entered into a credit agreement among the Company, the lenders party thereto and the Royal Bank of Canada as administrative agent. The Term Loan amount was for
$75 million
, with a term of one year.
The interest rates per annum applicable to amounts outstanding under the Term Loan are, at the Company’s option, either (a) the base rate plus
1.00%
, or (b) the Eurodollar rate plus 2.00% per annum. As of
June 30, 2014
, the interest rate was
2.22%
. Interest and the remaining principal payments associated with the Term Loan are due on the interest payment date of July 31 of 2014, with the remaining outstanding balance due on October 28, 2014. The principal balance outstanding as of June 30, 2014 is $37.5 million.
Any future material domestic subsidiaries of the Company are required to guarantee the obligations of the Company under the Term Loan, except as otherwise provided. The Company’s obligations under the Term Loan are secured by a lien on a substantial portion of the Company's assets.
The Term Loan contains affirmative and negative covenants that the Company believes are usual and customary for a senior secured credit agreement. The Term Loan also requires compliance with certain financial covenants, including a maximum total leverage ratio and a debt service coverage ratio, in each case calculated as set forth in the Term Loan and compliance with which may be necessary to take certain corporate actions. The Term Loan contains events of default that the Company believes are usual and customary for a senior secured credit agreement.
Off-Balance Sheet Arrangements
As of
June 30, 2014
, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).
Contractual Obligations
Convertible Notes and Term Loan
As of
June 30, 2014
, our convertible notes and term loan contractual obligations consisted primarily of our February 2018 Notes, Term Loan, Series 2012 Notes and May 2015 Notes, which in the aggregate totaled
$541.1 million
in principal.
We expect that our debt service obligations over the next several years will consist of interest payments and repayment of our February 2018 Notes, Term Loan, Series 2012 Notes and our May 2015 Notes. We may further seek to exchange, repurchase or otherwise acquire the convertible notes in the open market in the future which could adversely affect the amount or timing of any distributions to our stockholders. We would make such exchanges or repurchases only if we deemed it to be in our stockholders’ best interest. We may finance such repurchases with cash on hand and/or with public or private equity or debt financings if we deem such financings are available on favorable terms.
Notes Receivable and Other Long Term Receivables
On October 1, 2013, PDL entered into a credit agreement with LENSAR, under which PDL made available to LENSAR up to $60 million to be used by LENSAR in connection with the commercialization of its currently marketed LENSAR Laser System. Of the $60 million available to LENSAR, an initial $40 million, net of fees, was funded by PDL at the close of the transaction. Upon the attainment by LENSAR of a specified sales milestone to be accomplished no later than September 30, 2014, PDL will fund LENSAR an additional $20 million. Outstanding borrowings under the loans bear interest at the rate of 15.5% per annum, payable quarterly in arrears.
On October 31, 2013, PDL entered into a credit agreement with Durata, whereby the Company made available to Durata up to $70.0 million. Of the $70.0 million available to Durata, an initial $25.0 million (tranche one), net of fees, was funded by the Company at the close of the transaction.
On May 27, 2014, the Company funded Durata an additional $15 million (tranche two) as a result of Durata's marketing approval of dalbavancin in the United States, which occurred on May 23, 2014 and was the milestone needed to receive the tranche two funding. Within 9 months after the occurrence of the tranche two milestone, Durata may request up to a single additional $30 million borrowing.
On November 5, 2013, PDL entered into a credit agreement with Direct Flow Medical, in which PDL will provide up to $50.0 million to Direct Flow Medical. Of the $50.0 million available to Direct Flow Medical, an initial $35.0 million, net of fees, was provided by the company at the close of the transaction. Upon the attainment of a specified revenue milestone to be accomplished no later than December 31, 2014, the Company will loan to Direct Flow Medical an additional $15.0 million, net of fees.
On February 18, 2014, PDL entered into a credit agreement with Paradigm Spine, in which PDL will provide up to $75.0 million to Paradigm Spine. Of the $75.0 million available to Paradigm Spine, an initial $50.0 million, net of fees, was provided by the company at the close of the transaction. Upon the attainment of specified sales and other milestones to be accomplished no later than December 31, 2014, the Company will loan to Paradigm Spine an additional $12.5 million, net of fees. Upon the attainment of additional specified sales and other milestones to be accomplished no later than December 31, 2015, the Company will loan to Paradigm Spine an additional $12.5 million, net of fees.
Lease Guarantee
In connection with the Spin-Off, we entered into amendments to the leases for our former facilities in Redwood City, California, under which Facet was added as a co-tenant, and a Co-Tenancy Agreement, under which Facet agreed to indemnify us for all matters related to the leases attributable to the period after the Spin-Off date. Should Facet default under its lease obligations, we could be held liable by the landlord as a co-tenant and, thus, we have in substance guaranteed the payments under the lease agreements for the Redwood City facilities. As of
June 30, 2014
, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately
$84.6 million
. If Facet were to default, we could also be responsible for lease related costs including utilities, property taxes and common area maintenance which may be as much as the actual lease payments. We have recorded a liability of
$10.7 million
on our Condensed Consolidated Balance Sheets as of
June 30, 2014
, and
December 31, 2013
, related to this guarantee.
Indemnification
As permitted under Delaware law and under the terms of our bylaws, the Company has entered into indemnification agreements with its directors and executive officers. Under these agreements, the Company has agreed to indemnify such individuals for certain events or occurrences, subject to certain limits, against liabilities that arise by reason of their status as directors or officers and to advance expense incurred by such individuals in connection with related legal proceedings. While the maximum amount of potential future indemnification is unlimited, we have a director and officer insurance policy that limits our exposure and may enable us to recover a portion of any future amounts paid.