PDL BioPharma Inc. (PDLI) recently announced that it expects to generate second-quarter 2012 royalty revenues of $125 million, an increase of 2% over the year-ago revenues of $122 million.

PDL BioPharma receives royalties on worldwide net sales of Roche Holdings Ltd.’s (RHHBY) Avastin and Herceptin; Roche and Novartis’ (NVS) Lucentis and Xolair; and Elan Corporation (ELN) and Biogen Idec’s (BIIB) Tysabri.

Royalty payments for Roche’s products are tiered in the US, while PDL BioPharma receives a flat 3% royalty if a product is both manufactured and sold outside the US. Tysabri royalties are calculated at a flat rate as a percentage of sales, irrespective of the manufacturing or sales location.

The anticipated growth in royalty revenues primarily emanates from higher sales of Herceptin (up 4%), Lucentis (up 15%), Xolair and Tysabri (up 13%) during the first quarter of 2012, on which PDL will receive royalties in the second quarter.

Effective from the second quarter of 2011, PDL BioPharma started paying back a portion of the royalties it receives on Lucentis sales outside the US to Novartis. The payment is made in accordance with a settlement agreement, which the companies had entered into in February 2011. The second quarter 2012 revenue guidance is net of this payment.

Avastin sales suffered due to the withdrawal of the drug in the US for the metastatic breast cancer indication as well as pricing pressure in the EU. In the first quarter of 2012, Roche reported a mere 1% year-over-year growth in Avastin revenues.

In the first quarter of 2012, PDL’s royalty revenues of $77.3 million represented an increase of 5.5% from the year-ago period. Increased royalties on sales of Herceptin, Lucentis, Xolair and Tysabri drove first quarter 2012 royalties.

Our Recommendation

Currently, we have an Outperform recommendation on PDL BioPharma. The stock carries a Zacks #1 Rank (“Strong Buy”) in the short term.

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