PDL BioPharma, Inc.

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PDL BioPharma, Inc.

1400 Seaport Boulevard
Redwood City, California 94063
U.S.A.
Telephone: (650) 454-1000
Fax: (650) 454-2000
Web site: http://www.pdl.com

Public Company
Incorporated: 1986 as Protein Design Labs, Inc.
Employees: 1,100
Sales: $414.77 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: PDLI
NAIC: 32541 Pharmaceutical and Medicine Manufacturing; 325412 Pharmaceutical Preparation Manufacturing; 325414 Biological Product (Except Diagnostic) Manufacturing; 54171 Research and Development in the Physical, Engineering, and Life Sciences

PDL BioPharma, Inc., creates new treatments for serious medical conditions. Formerly called Protein Design Labs, the company is best known for "humanized" antibodies designed to attack cancer cells and viruses on a molecular level. These revolutionary products include Avastin, used primarily in treating metastatic colorectal cancer, and Herceptin for advanced breast cancer (both produced under license by Genentech). PDL BioPharma also makes products for other conditions, such as cardiovascular illnesses, asthma, and hypertension.

Formed in 1986, PDL BioPharma was known as Protein Design Labs, Inc. (PDL), until 2006. In its first decade and a half, PDL BioPharma's predecessor survived on licensing royalties. It then began to manufacture and market its own products, such as Cardene IV, an intravenous hypertension treatment, which it acquired with the 2005 purchase of ESP Pharma Inc.

The company has its headquarters and research and development labs in Fremont, California, while manufacturing operations are located in Brooklyn Park, Minnesota. PDL's Commercial Products division is based in Edison, New Jersey. There is also a European sales office in Paris.

ORIGINS

PDL BioPharma, Inc., was formed as Protein Design Labs, Inc. (PDL), in July 1986. It was based in California in the Mountain View area. Cofounder Cary L. Queen had helped invent the antibody humanization technology that would be the company's main focus. Queen became vice-president of research while Dr. Laurence J. Korn served as CEO.

When mice are exposed to disease-causing agents, their bodies produce antibodies to fight them. These can be harvested, but to be useful to humans the body's immune response must be prevented from rejecting the introduced antibodies.

PDL developed a means to alter molecules to make them more acceptable to human immune systems. Computer modeling was at the heart of its technology, allowing researchers to see if the humanized antibodies would still match their intended targets. The DNA of the resulting molecules, called monoclonal antibodies or MAbs, was more than 90 percent human. PDL referred to the concept under the trademark "SMART Antibodies."

Hoffmann-La Roche Inc. was an early partner in this pioneering research. In 1989 it began using PDL's first licensed MAb, called humanized Anti-Tac and later Zenapax (daclizumab). Its goal was to make drugs to prevent tissue rejection in organ transplants and other uses.

Swiss pharmaceuticals company Sandoz Pharma Ltd. contracted PDL to work on anticancer antibodies beginning in 1991. Other early partners included Yamanouchi Pharmaceutical Co. Ltd. and Kanebo Ltd.

INITIAL PUBLIC OFFERING IN 1992

PDL had an initial public offering on the NASDAQ in January 1992, which raised $52.5 million. According to Dow Jones, the company had lost about $4 million in its first few years, but this was a relatively small amount by the standards of the research-intensive biotech industry.

Though PDL had just two antibodies in trials at the time, the wide range of potential applications being researched would be often cited as a reason investors felt the company was a safer bet than other biotechs. However, some of the illnesses it would attempt to treat, such as cytomegalovirus (CMV) retinitis, a complication of AIDS, represented very small markets. PDL acquired antibody patents related to CMV, hepatitis B, herpes, and other illnesses from Sandoz in 1993.

In February 1992, PDL bought a small contract manufacturing business in Plymouth, Minnesota, from Helix BioCore Inc. (later called ATS Medical). The 38,000-square-foot plant would be used to produce antibodies in the quantities needed for clinical trials. The plant was brought online quickly, Korn told Dow Jones; PDL produced its first batch of SMART M195 antibody there within a year and a half.

PDL grew to approximately 200 employees in 1994 as annual revenues exceeded $15 million. The company was losing increasing amounts of money as it developed new drugs—-more than $8 million in 1995; however, it maintained reserves of about $100 million.

MABS PATENT IN 1996

PDL received patent protection for humanized monoclonal antibodies in December 1996. The patent also applied to humanized MAbs created at other laboratories, which then had to pay PDL licensing fees to continue their research. Two of these companies, Genentech Inc. and MedImmune Inc., would become PDL's largest source of royalty revenues. Several other pharmaceutical companies signed up for development rights following PDL's patent award.

The wide ranging patent helped assure a future stream of royalties in one of the fastest-growing areas of pharmacology, and investors responded positively. A secondary public offering in 1997 brought in $73 million. PDL raised another $100 million three years later by issuing convertible notes. Another public offering in 2000 raised $355 million. Revenues were up to $36 million by 1999, but the company was still losing money, about $10 million a year.

COMMERCIALIZED PRODUCTS

PDL maintained a healthy cash balance in a number of ways. The development deals it signed with large pharmaceutical companies typically involved an upfront payment, plus awards for reaching certain milestones in research. Also, PDL received royalties if the drugs ultimately made it to market.

COMPANY PERSPECTIVES

As a commercial business, it's part of our stated aims to become a premier biopharmaceutical company that develops, manufactures and markets novel therapies that save lives. We are committed to growing our business by continuing to support our commercial products and becoming a profitable enterprise, while we research and develop innovative therapies that help patients and physicians worldwide.

Zenapax (daclizumab) was the first humanized antibody to result in a commercial product. It was approved by the Food and Drug Administration (FDA) to treat kidney transplant rejection in 1997. Hoffmann-La Roche, which had been working with Zenapax for several years, continued to develop the antibody for other uses. Roche relinquished most of these rights in 2003, while working on a version of the drug to prevent rejection of other transplant organs besides kidneys for another couple years. It also began researching an asthma treatment based on Zenapax, but terminated these remaining programs by November 2006.

In August 2005 Massachusetts's Biogen Idec Inc. had acquired the rights to develop a version of Zenapax to treat multiple sclerosis and other conditions. It also bought rights for two other MAbs; it was investigating volociximab for tumors and fontolizumab for Crohn's disease.

By this time, PDL's research had resulted in other MAb products, two of which met with great commercial success. Herceptin (trastuzumab) was a promising treatment for specific types of breast cancer brought to market by Genentech around 1998. Avastin (bevacizumab), originally intended for treat colon cancer, was approved several years later. Roche distributed both of these in Europe.

In 2000 PDL had four FDA-approved MAbs on the commercial market, together accounting for gross sales of $700 million. By the end of 2004, this had grown to eight humanized antibodies, representing a global $3 billion business, according to the company.

NEW DIRECTION IN 2002

A new management team was hired near the end of 2002, including CEO Mark McDade. McDade had executive experience with a variety of pharmaceutical companies. Under his watch, PDL would be transformed from a pure research company to one that manufactured its own pharmaceuticals.

Another offering of convertible subordinated notes brought in $250 million in July 2003. Some of the proceeds were earmarked to support the design and construction of a new 210,000-square-foot manufacturing and office facility in Brooklyn Park, Minnesota. This was a complex undertaking that took years to complete at a cost of more than $200 million. The structure was opened in 2004, but another couple years' work lay in readying it for full-scale production.

Two acquisitions helped establish PDL as a commercial pharmaceuticals manufacturer within three years. Eos Biotechnology was added in April 2003 in an all-stock deal worth $37.5 million. Based in San Francisco, Eos was researching antibody products for tumors and macular degeneration. A much larger acquisition followed a couple of years later.

ESP PHARMA ACQUIRED IN 2005

In March 2005, PDL bought ESP Pharma Inc. of Edison, New Jersey, in a cash and stock deal worth $475 million (plus $14 million in assumed debt). ESP made Retavase (reteplase), used to prevent blood clots in heart attack patients. Another key product was Cardene IV, an intravenous treatment for hypertension that ESP had acquired from Wyeth Pharmaceuticals Inc. ESP had annual sales of about $90 million, most of it from Cardene.

The number of PDL employees rose by almost a third to nearly 1,000 in 2005. The addition of $122 million in product sales to royalty, licensing, and other income resulted in a leap in total revenues, which increased from $96.0 million in 2004 to $280.6 million in 2005. At the same time, the net loss swelled from $53.2 million in 2004 to $165.7 million in 2005. Revenues reached $414.8 million in 2006 as losses fell to $130 million.

FOUNDATIONS FOR THE FUTURE

Protein Design Labs, Inc., and its subsidiary ESP Pharma, Inc., were combined into PDL BioPharma, Inc., in January 2006. During the year, PDL Bio-Pharma's net loss narrowed by more than 20 percent to $130 million in 2006 as revenues leapt from $280 million to $415 million. PDL seemed poised to enter a new phase in its development, that of a profitable company.

Developing new products was a priority for the company, as key patent expirations were not far off: the patent for Cardene was set to expire in 2009, and the patent on humanized antibodies a few years after that. PDL had sold the last of its off-patent drugs in 2006.

KEY DATES

1986:: Company formed as Protein Design Labs, Inc. (PDL).
1992:: PDL has IPO, buys small manufacturing facility in Plymouth, Minnesota.
1997:: Zenapax is first humanized antibody on the market.
1998:: Herceptin breast cancer treatment introduced.
2002:: Company begins building large-scale biologics manufacturing site in Minneapolis.
2005:: PDL buys ESP Pharma, gaining a sales force and products.
2006:: PDL and ESP Pharma combined into PDL BioPharma, Inc.

After all its growth in business and personnel, the company was moving from Fremont, California, to a new, larger headquarters in Redwood City. The choice new home was criticized as excessive by a hedge fund manager who had acquired a holding in the company. He also questioned the amount PDL was spending on research and development. A three-month internal investigation into alleged breach of fiduciary responsibility at the top came up groundless. Nevertheless, stung by the vicious and personal nature of accusations against him, CEO Mark Dade announced plans to leave the company.

Frederick C. Ingram