I believe most of people already know PDLI royalty income issue, and I just simply summarize in the following paragraph. All information came from PDLI 10K and 10Q.
PDLI re-classed the royalty payment from Depomed as investment, and used discounted cash flow analysis. It increased PDLI income for $18,976,000, and this re-classed lead SEC raised concern and requested the company submitted additional information.
In the asset side of Depomed investment, PDLI re-classed the Depomed intangible to investment, and used discounted cash flow analysis instead of amortization.
I leave both issues to SEC and law firm to pursue, and I am interest to their business model.
Most of people think PDLI is a cash cow and generated static income from its Queen et al patent. However, people don’t realize the patent is expiring in this year 12/2/2014.
“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.” From PDLI 10 Q 06/30/2014.
It will greatly affect PDLI’s royalty income once the patent expires. In order to maintain the dividend payment, PDLI decided to investment into smaller pharmaceutical company.
PDLI started lend money to other pharmaceutical companies in 2012.
First, we should see the breakdown of note receivables for threes years for comparison.
unaudited
Year 2014/6months 2013 2012 2011
Wellstat $50.191M $47.694M $41.098M $ -
Merus Labs$ - $ - $30M $ -
AxoGen $28.942M $26.544M $22.110M $ -
Avinger $20.422M $20.250M $ - $ -
LENSAR $39.591M $39.572M $ - $ -
Durata $40M $24.995M $ - $ -
DFM $35.049M $34.799M $ - $ -
Paradigm S $49.517M $ - $ - $ -
Kaleo $155.407M $ - $ - $ -
Hyperion $1.2M $1.194M $ - $ -
Total NR $420.319M $195.048M $93.208M $ -
There is 450% increase of note receivable from 2012 to 2014, and it will be safe to say that PDLI invested heavily into small pharmaceutical companies in the last three years.
Second, we should look at the term that PDLI offer to these small pharmaceutical companies. I summarized the notes receivable term in the following list, and all information came from 10 Q 6/30/2014.
6. Notes Receivable and Other Long-term Receivables
Wellstat Diagnostics Note Receivable and Credit Agreement
$50.2 million and defaulted in June 2014.
$40M 5% interest rate
$10M 12% interest rate
Hyperion
Loan $2.3M
Royalty from Jan 1, 2012 to Dec 31, 2013
Two payment for $1.2m each payable on Mar 5, 2013 and Mar 5, 2014.
Paid $1.2M in Mar 5, 2013.
$1.2 million defaulted in March 5, 2014.
AxoGen
PDLI paid $20.8 million but accounted for $29 million in the book.
9.95% royalties based on AxoGen’s net revenues.
Avinger
$20.5 million for 12% interest rate. Maturity date is April 2018.
LENSAR
$35 million for 15.5% interest rate. Maturity date is oct 2018.
Durata
$40M for 14% interest rate. Maturity date is oct 2018.
Direct Flow medical
$35 million for 15.5% int rate. Maturity date is nov, 2018.
Paradigm Spine
$49 million for 13% int rate. Maturity date is aug 2019.
kaleo
$155m for 13% int rate. Maturity date is mar 2029.
10% net sale of Evzio.
100% royalty from Auvi-Q.
It appears that PDLI loaning money to these small pharmaceutical companies for at least more than 10% of interest rate.
Third, we should look up PDLI notes payable amount and the interest rate.
As of unaudited
Year 06/2014 06/2014 2013 2012 2011
Series 2012 Note 2.875% $47.160M $172.63M $165.528M $ -
May 2015 Notes 3.75% $150.797M $148.253M $143.433M $138.952M
Feb 2015 Notes 4% $272.824M $ - $991,000 $177.663M
Term Loan 2.22% $37.364M $74.397M $ - $93.37M
Total NP $508.145M $395.28M $309.952M $409.985M
PDLI paid the interest no more than 5% to the bond holders.
Conclusion:
PDLI loaned money to small pharmaceutical companies, and most of them are not listed in the stock market and they won’t posted their financial statement in their web site. There are two companies that are listed in the stock market which are AxoGen and Durata.
Durata
2013 2012 2011
Net Income $(62,141,000) $(62,539,000) $(33,033,000)
AxoGen
2013 2012 2011
Net Income $(14,557,000) $(9,418,000) $(10,248,000)
Both companies had negative net income for the last three years. If company had positive net income, then it would try to obtain money from cheaper source, such as bank or issue stocks. PDLI lend money to the companies because they knew that they had no other option beside them. These companies were not able to obtain cheap money and they had to give up everything in order to obtain money from PDLI. PDLI became pharmaceutical pawn shop, and this is a very risky business. These companies will be default their loan at any time. According to the PDLI 6/30/2014-10Q filing, Wellstat and Hyperion already defaulted their payment. Although, it is only about 12.22% of total note receivable, but this is a hint. As of 9/23/2014, PDLI invested approximately $750M, and there is no sight to slow down. PDLI is ballooning their finance business and the cash will be a problem. PDLI will either increase the credit line with bank or issue more bonds to get more cheap money to sustain their finance business. If there are more companies default their obligation, then it will eventually put PDLI into insolvency. So far PDLI still has solid income to support them to obtain cheap money from the bank and public. How long it can be sustain? I do not know. However, PDLI’s business model looks similar to Lehman Brothers that invested heavily into the sub-prime incident.
