It looks like PDL BioPharma (Nasdaq: PDLI) just added another potential blockbuster biologic to its royalty-bearing lineup. On Friday (Jan 8 ) Roche (OTC: RHHBY.pk) subsidiary Genentech announced that the FDA approved its rheumatoid arthritis treatment tocilizumab (brand name Actemra) here in the U.S.

Actemra has already been approved for marketing in multiple regions outside the U.S. but the approval of Actemra allows PDL to finally get royalties on a product in the U.S. for the multi-billion dollar rheumatoid arthritis arena.

Actemra isn’t the first humanized monoclonal antibody for rheumatoid arthritis that PDL claims it should be receiving royalties on. PDL and Celltech signed deals dating back to 1999 requiring Celltech (now part of Belgium-based UCB) to pay royalties on humanized monoclonal antibodies it developed (Cimzia presumably being one of those monoclonal antibodies) if they gained approval anywhere in the world. PDL claims UCB should be paying royalties on Cimzia but UCB believes otherwise and the two companies have gone into a binding arbitration hearing over the issue.

In 2008 and late 2009 Cimzia was approved by the FDA and EMEA  as a treatment for Crohn’s disease (U.S. only) and rheumatoid arthritis with sales of approximately $35 million in the first half of 2009. Cimzia sales growth should pick up rapidly in the coming years with the recent European Union and U.S. rheumatoid arthritis approvals. Sales of Cimzia should fairly easily reach upwards of $750 million annually during the time which PDL should be receiving royalties on the compound.

If the legal actions between PDL and UCB goes PDL’s way then that could mean upwards of $100 million in royalty payments on the value of Cimzia manufactured from its approval date and through 2014 not included in our or others’ PDL cash flow models (even accounting for taxes) that could accrue to PDL depending on the terms of the PDL and Celltech license agreements.

It should be noted that PDL does not include Cimzia revenue in any of its forecasts and neither do any analysts. The litigation risk with UCB represents probably the biggest risk to PDL shareholders but also a huge opportunity if the litigation concludes in favor of PDL. For example, here is a sampling of analyst forecasts for Cimzia sales:

J.P. Morgan forecasts peak Cimzia sales of $2.2 billion annually and for Cimzia to capture 12.5% of a $20 billion anti-TNF market in 2015

Societe Generale forecasts “total peak sales of about 2.0bn euro” annually ($2.8 billion) over the long-run, on the condition that the CD indication is approved in Europe.  Societe Generale forecasts Cimzia sales of 58 million euro ($81 million) in 2009, 128 million euro ($179 million) in 2010, and 251 million euro ($351 million) in 2011.

Jeffries estimates peak Cimzia sales of 2.1 billion euro ($2.94 billion) annually with sales of the biologic reaching 182 million euro ($255 million) in 2010, 356 million euro ($498 million)  in 2011, 636 million euro ($890 million)  in 2012, and 943 million euro ($1.32 billion) in 2013.

Here is how much PDL could receive from UCB if it is able to win its litigation against UCB and then receives a flat 1.5% (conservative) or 3% (optimistic) royalty on the value of all Cimzia manufactured and we use the Jeffries forecast. Jeffries hasn’t publicly stated its 2014 Cimzia sales forecast, which we assume to be about 15% above its 2013 Cimzia sales forecast. This would mean a total of $1.52 billion in Cimzia sales in 2014.

If the royalty rate is 1.5% then PDL stands to gain 1.5%*~$4.5 billion= $67.5 million in royalty revenue on Cimzia sales between now and the end of 2014

If the royalty rate is 3.0% then PDL stands to gain 3.0%*~$4.5 billion= $135 million in royalty revenue  on Cimzia sales between now and the end of 2014.

Discounting the value of these royalties back to today is a difficult task because of the uncertainty of when PDL may win the litigation against UCB so we don’t use Cimzia in our valuation of PDL shares. Nevertheless it is worth noting how much Cimzia royalties could be worth to PDL.

Here’s what PDL wrote about the terms of the Celltech agreement back in 2002:

“In December 1999, we entered into a patent rights agreement with Celltech covering specified patents relating to humanized monoclonal antibodies. Under the agreement, Celltech paid us a $3.0 million fee for the right to obtain worldwide licenses under our antibody humanization patents for up to three Celltech antibodies. We paid Celltech a fee for the right to obtain worldwide licenses under Celltech’s antibody humanization patent for up to three of our antibodies. When a license is taken by either company, the other will be entitled to an additional license fee. Each company will pay royalties to the other on any sales of licensed antibodies. In December 2001, Celltech obtained, pursuant to the exercise of certain of its rights under the agreement, a nonexclusive license for antibodies directed to tumor necrosis factor-alpha.”

Patent litigation and arbitration is always messy and we are not patent attorneys so we cannot judge which way the PDL and UCB Cimzia patent fight will go. Nevertheless, last week’s FDA Actemra approval guarantees PDL will be receiving its slice of the royalty pie from at least one biologic in the very large and growing U.S. rheumatoid arthritis market.

Actemra is only approved as a treatment for RA patients failing the TNF inhibitors and is almost certainly subject to the recent PDL monetization of 60% of its Genentech royalties but it should still provide PDL with a new solid source of cash flow in the coming years if it can capture even 5% of the rheumatoid arthritis market…and for those of you wondering where Actemra is manufactured in determining whether PDL will be cashing in on the flat-rate ROW 3% or the tiered Genentech royalty structure with Actemra, initially at least, it was planned to manufacture Actemra at a Chugai manufacturing plant in Japan but now Genentech’s Vacaville, California facility will step in and produce the bulk drug substance with Chugai’s Japan facility providing cell cultures.

It’s also worth pointing out that Actemra has been on the market since 2005 in Japan and early 2009 in the European Union with Chugai booking approximately $35 million in revenue from the compound in 2008. Chugai forecasts Actemra revenue for itself (not counting Roche’s Actemra revenue) growing 184% in 2009 to approximately $100 million. With the U.S. market now entering this equation, this should boost Actemra worldwide sales significantly even in the face of the 2009 FDA approval for Johnson and Johnson’s TNF-alpha inhibitor rheumatoid arthritis compound Simponi (golimumab).

All of this only reaffirms our reasoning behind a PDL share price purchase in conjunction with a sale of the May 2010 $7.50 call options as we outline in a previous post. Less risk-adverse investors may choose to just purchase PDL shares but we believe selling the call options in addition to a PDL share purchase provides risk-adverse investors with the highest chance for  gains and at the same time significantly reduces the chances of taking a loss on the trade (thanks to the call option premium received). It’s not a trade where you can potentially strike it rich but we are much more fond of taking singles and doubles when they arise than trying to hit home runs and striking out in the biotech sector.

See our other recent post on PDL:

www.biotechspeculators.com/2009/12/pdl-biopharma-shares-for-christmas