UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 (Mark One)
ýQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 20162017
OR
¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For transition period from               to            
Commission File Number: 000-19756
 
pdl-logoa05a01a01a01a06.jpg
PDL BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
 
Delaware94-3023969
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
932 Southwood Boulevard
Incline Village, Nevada 89451
(Address of principal executive offices and Zip Code)
(775) 832-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý    No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
(Do not check if a smaller reporting company)
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  ý
As of April 25, 201624, 2017, there were 165,114,611160,984,446 shares of the registrant’s Common Stock outstanding.



 PDL BIOPHARMA, INC.
20162017 Form 10-Q
Table of Contents
 Page
GLOSSARY OF TERMS AND ABBREVIATIONS (as used in this document)
3
PART I - FINANCIAL INFORMATION
   
ITEM 1.FINANCIAL STATEMENTS (unaudited)
53
   
 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 20162017 and 20152016
53
   
 Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 20162017 and 20152016
64
   
 Condensed Consolidated Balance Sheets at March 31, 2016,2017 and December 31, 20152016
75
   
 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 20162017 and 20152016
86
   
 Notes to the Condensed Consolidated Financial Statements
97
   
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
3641
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
6252
   
ITEM 4.CONTROLS AND PROCEDURES
6353
 
PART II - OTHER INFORMATION
   
ITEM 1.LEGAL PROCEEDINGS
6454
   
ITEM 1A.RISK FACTORS
6454
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
54
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
54
ITEM 4.MINE SAFETY DISCLOSURES
54
ITEM 5.OTHER INFORMATION
54
   
ITEM 6.EXHIBITS
6454
  
SIGNATURES
6555
We own or have rights to certain trademarks, trade names, copyrights and other intellectual property used in our business, including PDL BioPharma and the PDL logo, each of which is considered a trademark. All other company names, product names, trade names and trademarks included in this Quarterly Report on Form 10-Q are trademarks, registered trademarks or trade names of their respective owners.


GLOSSARY OF TERMS AND ABBREVIATIONS
Abbreviation/termDefinition
'216B PatentEuropean Patent No. 0 451 216B
'761 PatentU.S. Patent No. 5,693,761
AbbVieAbbVie Biotherapeutics, Inc.
Accel 300Accel 300, LLC, a wholly-owned subsidiary of kaléo
AcelRxAcelRx Pharmaceuticals, Inc.
AcelRx Royalty AgreementRoyalty Interest Assignment Agreement, dated September 18, 2015, between PDL and AcelRx
AlphaeonALPHAEON Corporation
APICAdditional paid-in-capital
ARIADARIAD Pharmaceuticals, Inc.
ARIAD Royalty AgreementRoyalty Interest Assignment Agreement, dated July 28, 2015, between PDL and ARIAD
ARIAD Royalty Rights
The right to receive specified royalties on ARIAD’s Net Revenues (as defined in the ARIAD Royalty Agreement) generated by the sale, distribution or other use of ARIAD’s product Iclusig® (ponatinib)
ASCAccounting Standards Codification
ASUAccounting Standards Update
AvingerAvinger, Inc.
Avinger Credit and Royalty AgreementCredit Agreement, dated April 18, 2013, between PDL and Avinger
AxoGenAxoGen, Inc.
AxoGen Royalty AgreementRevenue Interests Purchase Agreement, dated as of October 5, 2012, between PDL and AxoGen
BiogenBiogen, Inc.
CareViewCareView Communications, Inc.
ChugaiChugai Pharmaceutical Co., Ltd.
Depo DR SubDepo DR Sub, LLC, a wholly-owned subsidiary of Depomed
DepomedDepomed, Inc.
Depomed Royalty AgreementRoyalty Purchase and Sale Agreement, dated as of October 18, 2013, among Depomed, Depo DR Sub and PDL
Direct Flow MedicalDirect Flow Medical, Inc.
DurataCollectively, Durata Therapeutics Holding C.V., Durata Therapeutics International B.V. and Durata Therapeutics, Inc. (parent company)
EBITDAEarnings before interest, taxes, depreciation and amortization
ElanElan Corporation, PLC
EPOEuropean Patent Office
ex-U.S.-based Manufacturing and SalesProducts that are both manufactured and sold outside of the United States
ex-U.S.-based SalesProducts that are manufactured in the United States and sold outside of the United States
FacetFacet Biotech Corporation. In April 2010, Abbott Laboratories acquired Facet and later renamed the company Abbott Biotherapeutics Corp., and in January 2013, Abbott Biotherapeutics Corp. was renamed AbbVie and spun off from Abbott Laboratories as a subsidiary of AbbVie Inc.
FASBFinancial Accounting Standards Board
FDAU.S. Food and Drug Administration
February 2015 Notes2.875% Convertible Senior Notes due February 15, 2015, fully retired at September 30, 2013
February 2018 Notes4.0% Convertible Senior Notes due February 1, 2018
GAAPU.S. Generally Accepted Accounting Principles
GenentechGenentech, Inc.
Genentech Products
Avastin®, Herceptin®, Lucentis®, Xolair®, Perjeta® and Kadcyla®
GenzymeGenzyme Corporation (a Sanofi company)
HyperionHyperion Catalysis International, Inc.
IRSInternal Revenue Service
kaléokaléo, Inc. (formerly known as Intelliject, Inc.)


kaléo Revenue Interests100% of the royalties from kaléo’s first approved product, Auvi-Q™ (epinephrine auto-injection, USP) (known as Allerject in Canada) and 10% of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection), collectively
KMPGKPMG, LLP
LENSARLENSAR, Inc.
LillyEli Lilly and Company
March 2015 Term LoanTerm Loan borrowed under the Credit Agreement, dated as of March 30, 2015, among PDL, the Royal Bank of Canada and lenders thereto, fully retired on February 12, 2016
May 2015 Notes3.75% Senior Convertible Notes due May 2015, fully retired on May 1, 2015
MerckMerck & Co., Inc.
Michigan Royalty AgreementRoyalty Purchase and Sale Agreement, dated as of November 6, 2014, between The Regents of the University of Michigan and PDL
New LENSARLENSAR, LLC a wholly-owned subsidiary of Alphaeon (formerly known as Lion Buyer LLC)
NovartisNovartis AG
OCIOther Comprehensive Income (Loss)
Paradigm SpineParadigm Spine, LLC
Paradigm Spine Credit AgreementParadigm Spine Credit Agreement, dated February 14, 2014, between Paradigm Spine and the Company
PDL, we, us, our, the CompanyPDL BioPharma, Inc.
Queen et al. patentsPDL's patents in the United States and elsewhere covering the humanization of antibodies
RocheF. Hoffman LaRoche, Ltd.
SalixSalix Pharmaceuticals, Inc.
SantarusSantarus, Inc.
SDKShowa Denka K.K.
SECSecurities and Exchange Commission
Series 2012 Notes2.875% Series 2012 Convertible Senior Notes, fully retired on February 15, 2015
Settlement AgreementSettlement Agreement between and among PDL, Genentech and Roche, dated January 31, 2014
SPCsSupplementary Protection Certificates
SPC ProductsAvastin, Herceptin, Lucentis, Xolair and Tysabri
Spin-OffThe spin-off by PDL of Facet
TakedaTakeda Pharmaceuticals America, Inc.
U-MUniversity of Michigan
Valeant PharmaceuticalsValeant Pharmaceuticals International, Inc.
VBViscogliosi Brothers, LLC
VB Royalty AgreementRoyalty Purchase and Sale Agreement, dated as of June 26, 2014, between VB and PDL
VWAPVolume-weighted average share price
Wellstat DiagnosticsWellstat Diagnostics, LLC
Wellstat Diagnostics Borrower NoticeA notice of default to Wellstat Diagnostics, due to, inter alia, its ongoing failure to pay its debts as they became 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
Wellstat Diagnostics Guarantor NoticeA notice to each of the guarantors of Wellstat Diagnostics' obligations to the Company under the credit agreement
Wellstat Diagnostics GuarantorsSome or all of: Samuel J. Wohlstadter; Nadine H. Wohlstadter; Duck Farm, Inc.; Hebron Valley Farms, Inc.; HVF, Inc.; Hyperion Catalysis EU Limited; Hyperion; NHW, LLC; Wellstat AVT Investment, LLC; Wellstat Biocatalysis, LLC; Wellstat Biologics Corporation; Wellstat Diagnostics; Wellstat Immunotherapeutics, LLC; Wellstat Management Company, LLC; Wellstate Opthalmics Corporation; Wellstat Therapeutics Corporation; Wellstat Therapeutics EU Limited; Wellstat Vaccines, LLC; and SJW Properties, Inc.
Wellstat Diagnostics Note Receivable and Credit AgreementSenior Secured Note receivable among the Company and the holders of the equity interests in Wellstat Diagnostics, as amended, and Credit Agreement between Wellstat Diagnostics and the Company, dated November 2, 2012, as amended
Wellstat Diagnostics PetitionAn Ex Parte Petition for Appointment of Receiver with the Circuit Court of Montgomery County, Maryland


PART I. FINANCIAL INFORMATION
 
ITEM  1.         FINANCIAL STATEMENTS
 
PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

 Three Months Ended Three Months Ended
 March 31, March 31,
 2016 2015 2017 2016
Revenues        
Royalties from Queen et al. patents $121,455
 $127,810
 $14,156
 $121,455
Royalty rights - change in fair value (27,102) 11,362
 13,146
 (27,102)
Interest revenue 8,964
 10,534
 5,457
 8,964
Product revenue, net 12,581
 —
License and other (193) —
 100
 (193)
Total revenues 103,124
 149,706
 45,440
 103,124
        
Operating expenses  
  
  
  
Cost of product revenue (excluding intangible asset amortization) 2,552
 —
Amortization of intangible assets 6,015
 —
General and administrative 9,846
 7,666
 12,576
 9,846
Sales and marketing 2,584
 —
Research and development 1,766
 —
Change in fair value of anniversary payment and contingent consideration 1,442
 —
Total operating expenses 26,935
 9,846
Operating income 93,278
 142,040
 18,505
 93,278
        
Non-operating expense, net  
  
  
  
Interest and other income, net 113
 86
 212
 113
Interest expense (4,550) (8,610) (4,971) (4,550)
Total non-operating expense, net (4,437) (8,524) (4,759) (4,437)
        
Income before income taxes 88,841
 133,516
 13,746
 88,841
Income tax expense 32,954
 49,018
 6,552
 32,954
Net income $55,887
 $84,498
 7,194
 55,887
Less: Net income/(loss) attributable to noncontrolling interests (47) —
Net income attributable to PDL’s shareholders $7,241
 $55,887
        
Net income per share  
  
  
  
Basic $0.34
 $0.52
 $0.04
 $0.34
Diluted $0.34
 $0.50
 $0.04
 $0.34
    
Weighted average shares outstanding  
  
  
  
Basic 163,701
 162,829
 163,745
 163,701
Diluted 163,835
 170,412
 163,992
 163,835
    
Cash dividends declared per common share $0.05
 $0.60
 $—
 $0.05
 
See accompanying notes.


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

 Three Months Ended Three Months Ended
 March 31, March 31,
 2016 2015 2017 2016
        
Net income $55,887
 $84,498
 $7,194
 $55,887
        
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 107
 (38) —
 107
Adjustment for net (gains) losses realized and included in net income, net of tax (124) —
 —
 (124)
Total change in unrealized gains on investments in available-for-sale securities, net of tax(a)
 (17) (38) —
 (17)
Change in unrealized gains (losses) on cash flow hedges:        
Change in fair value of cash flow hedges, net of tax —
 5,668
Adjustment to royalties from Queen et al. patents for net (gains) losses realized and included in net income, net of tax (1,821) (669) —
 (1,821)
Total change in unrealized losses on cash flow hedges, net of tax(b)
 (1,821) 4,999
 —
 (1,821)
Total other comprehensive income (loss), net of tax (1,838) 4,961
Total other comprehensive income/(loss), net of tax —
 (1,838)
Comprehensive income $54,049
 $89,459
 7,194
 54,049
Less: Comprehensive income/(loss) attributable to noncontrolling interests (47) —
Comprehensive income attributable to PDL’s shareholders $7,241
 $54,049
 ______________________________________________
(a) Net of tax of ($9)zero and ($20)9) for the three months ended March 31, 20162017 and 20152016, respectively.
(b) Net of tax of ($981)zero and $2,692($981) for the three months ended March 31, 20162017 and 20152016, respectively.

See accompanying notes.


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
March 31, December 31,March 31, December 31,
2016 20152017 2016
(unaudited) (Note 1)(unaudited) (Note 1)
Assets      
Current assets:      
Cash and cash equivalents$290,650
 $218,883
$314,327
 $147,154
Short-term investments1,306
 1,469
19,991
 19,987
Deferred tax assets—
 981
Receivables from licensees and other21,679
 40,120
Notes receivable84,615
 58,398
103,622
 111,182
Investments-other75,000
 75,000
Inventory3,533
 2,884
Prepaid and other current assets607
 2,979
5,867
 1,704
Total current assets377,178
 282,710
544,019
 398,031
   
Property and equipment, net22
 31
846
 38
Royalty rights - at fair value354,881
 399,204
293,801
 402,318
Notes and other receivables, long-term287,241
 306,507
157,403
 159,768
Long-term deferred tax assets26,358
 16,172
11,658
 19,257
Intangible assets, net222,527
 228,542
Other assets9,695
 7,581
7,519
 7,433
Total assets$1,055,375
 $1,012,205
$1,237,773
 $1,215,387
      
Liabilities and Stockholders' Equity 
  
Liabilities and Stockholders’ Equity 
  
Current liabilities: 
  
 
  
Accounts payable$662
 $394
$17,956
 $7,016
Accrued liabilities7,253
 8,009
36,800
 30,575
Accrued income taxes21,019
 3,372
9,309
 4,723
Term loan payable—
 24,966
Anniversary payment88,493
 88,001
Convertible notes payable122,692
 —
Total current liabilities28,934
 36,741
275,250
 130,315
   
Convertible notes payable230,850
 228,862
112,426
 232,443
Contingent consideration43,600
 42,650
Other long-term liabilities53,060
 50,650
43,561
 54,556
Total liabilities312,844
 316,253
474,837
 459,964
      
Commitments and contingencies (Note 8)

 

Commitments and contingencies (Note 11)

 

      
Stockholders' equity: 
  
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; 165,115 and 164,287 shares issued and outstanding at March 31, 2016, and December 31, 2015, respectively1,651
 1,643
Common stock, par value $0.01 per share, 350,000 shares authorized; 163,724 and 165,538 shares issued and outstanding at March 31, 2017, and December 31, 2016, respectively1,637
 1,655
Additional paid-in capital(117,205) (117,983)(113,707) (107,628)
Accumulated other comprehensive income418
 2,256
Treasury stock, at cost(1,305) —
Retained earnings857,667
 810,036
872,078
 857,116
Total stockholders' equity742,531
 695,952
Total liabilities and stockholders' equity$1,055,375
 $1,012,205
Total PDL’s stockholders’ equity758,703
 751,143
Noncontrolling interests4,233
 4,280
Total stockholders’ equity762,936
 755,423
Total liabilities and stockholders’ equity$1,237,773
 $1,215,387
See accompanying notes.


PDL BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31,Three Months Ended March 31,
2016 20152017 2016
Cash flows from operating activities      
Net income$55,887
 $84,498
$7,194
 $55,887
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Amortization of convertible notes and term loan offering costs2,461
 4,066
2,675
 2,461
Amortization of intangible assets6,015
 —
Change in fair value of royalty rights - at fair value27,102
 (11,362)(13,146) 27,102
Change in fair value of derivative asset329
 —
(100) 329
Change in fair value of anniversary payment and contingent consideration1,442
 —
Other amortization, depreciation and accretion of embedded derivative9
 10
66
 9
Gain on sale of available-for-sale securities(136) —
(44) (136)
Inventory obsolesence112
 —
Stock-based compensation expense786
 501
1,112
 786
Deferred income taxes(8,215) 3,343
15,321
 (8,215)
Changes in assets and liabilities: 
  
Changes in assets and liabilities, net of affects of business acquired: 
  
Accounts receivable12,441
 —
Receivables from licensees and other—
 300
6,000
 —
Prepaid and other current assets(430) (6,396)(2,073) (430)
Accrued interest on notes receivable(1,951) (2,594)(75) (1,951)
Inventory(761) —
Other assets(2,439) 11
16
 (2,439)
Accounts payable268
 297
10,932
 268
Accrued liabilities(1,169) (1,081)4,944
 (1,169)
Accrued income taxes17,647
 (3,293)4,586
 17,647
Other long-term liabilities2,357
 3,546
(10,875) 2,357
Net cash provided by operating activities92,506
 71,846
45,782
 92,506
Cash flows from investing activities 
  
 
  
Purchase of investments(15,975) —
Proceeds from sales of available-for-sale securities273
 —
16,015
 273
Proceeds from royalty rights - at fair value17,221
 938
13,494
 17,221
Sale of royalty rights - at fair value108,169
 —
Purchase of notes receivable(5,000) —
—
 (5,000)
Proceeds from sales of assets held for sale7,890
 —
Purchase of property and equipment(534) —
Net cash provided by investing activities12,494
 938
129,059
 12,494
Cash flows from financing activities 
  
 
  
Proceeds from term loan—
 100,000
Repurchase of convertible notes—
 (22,337)
Payment of debt issuance costs—
 (607)
Repayment of term loan(25,000) —
—
 (25,000)
Cash dividends paid(8,233) (24,549)(21) (8,233)
Net cash provided by (used in) financing activities(33,233) 52,507
Repurchase and retirement of common stock(7,647) —
Net cash used in financing activities(7,668) (33,233)
Net increase in cash and cash equivalents71,767
 125,291
167,173
 71,767
Cash and cash equivalents at beginning of the period218,883
 291,377
147,154
 218,883
Cash and cash equivalents at end of period$290,650
 $416,668
$314,327
 $290,650
      
   
Supplemental cash flow information 
  
 
  
Cash paid for income taxes$22,000
 $52,000
$120
 $22,000
Cash paid for interest$5,001
 $6,332
$2,529
 $5,001
Stock issued to settle debt$—
 $9,794
   
Supplemental schedule of non-cash investing and financing activities   
Warrants received for notes receivable$443
 $—
$—
 $443
Repurchase of common stock, settled in April 2017$868
 $—
Fixed assets purchase, not yet paid$(288) $—
Asset held for sale reclassified from notes receivable to other assets$10,000
 $—
See accompanying notes.


PDL BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20162017
(Unaudited)

1. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements of PDL Biopharma, Inc. and its subsidiaries (collectively, the “Company” or “PDL”) have been prepared in accordance with GAAPGenerally Accepted Accounting Principles (United States) (“GAAP”) for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments), that management of PDLthe Company 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 unaudited Condensed Consolidated Financial Statements and related financial information should be read in conjunction with ourthe Company’s audited Consolidated Financial Statements and the related notes thereto for the year ended December 31, 20152016, included in ourits Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC.Securities and Exchange Commission (“SEC”) on March 1, 2017. The Condensed Consolidated Balance Sheet at December 31, 20152016, has been derived from the audited Consolidated Financial Statements at that date, but does not include all disclosures required by GAAP.

Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of PDL and its wholly-owned subsidiaries. All material intercompany balances and transactionsThere have been eliminated in consolidation. Our accompanying unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP andno new or material changes to the rules and regulations of the SEC.

Management Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reportedsignificant accounting policies discussed in the financial statements and accompanying notes. Actual results could differ from those estimates.

Notes Receivable and Other Long-Term Receivables

We accountCompany’s Annual Report on Form 10-K for our notes receivable at both amortized cost, netthe fiscal year ended December 31, 2016, that are of unamortized origination fees, if any, and as dependent on collateral when the loan for which repayment is expected to be provided solely by the underlying collateral. For loans accounted for at their amortized cost, related fees and costs are recorded net of any amounts reimbursed. Interest is accretedsignificance, or accrued to "Interest revenue" using the effective interest method. When and if supplemental payments are received from certain of these notes and other long-term receivables, an adjustmentpotential significance to the estimated effective interest rate is affected prospectively.

We evaluate the collectability of both interest and principal for each note receivable and loan to determine whether it is impaired. A note receivable or loan is considered to be impaired when, based on current information and events, we determine it is probable that we will be unable to collect amounts due according to the existing contractual terms. When a note receivable or loan is considered to be impaired, the amount of loss is calculated by comparing the carrying value of the financial asset to the value determined by discounting the expected future cash flows at the loan's effective interest rate or to the estimated fair value of the underlying collateral, less costs to sell, if the loan is collateralized and we expect repayment to be provided solely by the collateral. Impairment assessments require significant judgments and are based on significant assumptions related to the borrower's credit risk, financial performance, expected sales, and estimated fair value of the collateral.

Convertible Notes

We issued our Series 2012 Notes, May 2015 Notes and February 2018 Notes with a net share settlement feature, meaning that upon any conversion, the principal amount will be settled in cash and the remaining amount, if any, will be settled in shares of our common stock. In accordance with accounting guidance for convertible debt instruments that may be settled in cash or other assets upon conversion, we separated the principal balance between the fair value of the liability component and the common stock conversion feature using a market interest rate for a similar nonconvertible instrument at the date of issuance.



Queen et al. Royalty Revenues

Under our Queen Patent license agreements, the Company receives royalty payments based upon our licensees’ net sales of covered products. Generally, under these agreements we receive royalty reports from our licensees approximately one quarter in arrears, that is, generally in the second month of the quarter after the licensee has sold the royalty-bearing product. We recognize royalty revenues when we can reliably estimate such amounts and collectability is reasonably assured. Under this accounting policy, the royalty revenues we report are not based upon our estimates and such royalty revenues are typically reported in the same period in which we receive payment from our licensees.

The Company also received annual maintenance fees from licensees of our Queen et al. patents prior to patent expiry as well as periodic milestone payments. We have no performance obligations with respect to such fees. Maintenance fees were recognized as they became due and when payment was reasonably assured. Total annual maintenance and milestone payments in each of the last several years have been less than 1% of total revenue.

Although the last of our Queen et al. patents expired in December 2014, we have received royalties beyond expiration based on the terms of our licenses and our legal settlement. Under the terms of the legal settlement between Genentech and PDL, the first quarter of 2016 is the last period for which Genentech will pay royalties to PDL for Avastin, Herceptin, Xolair, Kadcyla and Perjeta. Royalty payments for Avastin, Herceptin, Xolair, Kadcyla and Perjeta accounted for 86% of the $121.5 million Queen et al. royalty revenue recognized in the first quarter of 2016. Other products from the Queen et al. patent licenses entitle 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 licenses. The amount of royalties we are due for product manufactured prior to patent expiry but sold after patent expiry is uncertain; however, the Company's revenues from payments made from these Queen et al. patent licenses and settlements will materially decrease in the second quarter of 2016. The continued success of the Company will become more dependent on the timing and our ability to acquire new income generating assets in order to provide recurring revenues going forward and to support the Company's business model and ability to pay dividends.

Royalty Rights - At Fair Value

Currently, 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.

The changes in the estimated fair value from investments in royalty rights along with cash receipts each reporting period are presented together on our Condensed Consolidated Statements of Income as a component of revenue under the caption, “Royalty rights - change in fair value.”

Customer Concentration
The percentage of total revenue recognized, which individually accounted for 10% or more of our total revenues, was as follows:

    Three Months Ended March 31,
Licensee Product Name 2016 2015
Genentech Avastin 38% 26%
  Herceptin 38% 25%
  Xolair 13% 7%
       
Biogen 
Tysabri®
 14% 10%

Foreign Currency Hedging
From time to time, we may enter into foreign currency hedges to manage exposures arising in the normal course of business and not for speculative purposes.



Most recently, we hedged certain Euro-denominated currency exposures related to royalties associated with our licensees’ product sales with Euro forward contracts. In general, those contracts are intended to offset the underlying Euro market risk in our royalty revenues. The last of those contracts expired in the fourth quarter of 2015 and was settled in the first quarter of 2016. We designated 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 the hedge effectiveness. The fair value of the Euro forward contracts was estimated using pricing models with readily observable inputs from actively quoted markets and was disclosed on a gross basis. The aggregate unrealized gains or losses, net of tax, on the effective component of the hedge was recorded in stockholders’ equity as "Accumulated other comprehensive income." Realized 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 "Interest and other income, net" in the period the ineffectiveness occurs.

Income Taxes

The provision for income taxes is determined using the asset and liability approach. Tax laws require items to be included in tax filings at different times than the items are reflected in the financial statements. A current liability is recognized for the estimated taxes payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are adjusted for enacted changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Comprehensive Income (Loss)

Comprehensive income (loss) comprises net income adjusted for other comprehensive income (loss), using the specific identification method, which includes the changes in unrealized gains and losses on cash flow hedges and changes in unrealized gains and losses on our investments in available-for-sale securities, all net of tax, which are excluded from our net income.Company.

Adopted Accounting Pronouncements

In April 2015,March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, intended to improve the accounting for share-based payment transactions as part of its simplification initiative. The ASU requires entities to record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the statement of income. The recognition of excess tax benefits and deficiencies and changes to diluted earnings per share are to be applied prospectively.  For tax benefits that were not previously recognized because the related tax deduction had not reduced taxes payable, the Company recorded a $7.7 million cumulative-effect adjustment in retained earnings as of the beginning of 2017, the year of adoption. The Company applied the presentation changes for excess tax benefits from financing activities to operating activities in the statement of cash flows using a prospective transition method. The guidance allows for an election to recognize forfeitures as they occur rather than on an estimated basis. The Company will continue to account for forfeitures on an estimated basis. During the period ended March 31, 2017, there were no excess tax benefits recognized in the Consolidated Statement of Income and classified as an operating activity in the Condensed Consolidated Statement of Cash Flows.

In January 2017, the FASB issued ASU No. 2015-03,2017-01, SimplifyingClarifying the PresentationDefinition of Debt Issuance Costsa Business, included in ASC Topic 805, Business Combinations, which requiresrevises the definition of a business. The revised definition clarifies that debt issuance costs relatedoutputs must be the result of inputs and substantive processes that provide goods or services to a recognized debt liabilitycustomers, other revenue, or investment income. The guidance will be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and is effective for the Company's annual and interim reporting periods beginning January 1, 2018, and early adoption is permitted. The Company beginning inadopted the new definition of a business during the first quarter of 2016. The Company adopted this update in the first quarter of 2016 resulting in an immaterial2017, and it did not have a material impact on its unaudited condensed consolidatedbusiness practices, financial condition, results of operations, financial position and cash flows. At December 31, 2015, the Company had $4.0 million in unamortized debt expense that was classified as a long-term asset and reclassified as a contra liability included in long-term debt. As of March 31, 2016, long-term debt included a contra liability of $3.5 million for unamortized debt expense previously recognized as a long-term asset.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. ASU No. 2015-17 was adopted on a prospective basis by the Company in the first quarter of 2016, thus resulting in the reclassification of $1.0 million of current deferred tax liabilities to non-current on the accompanying condensed consolidated balance sheet. The prior reporting period was not retrospectively adjusted. The adoption of this guidance had no impact on the Company’s results of operations, financial positions or cash flows.disclosures.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The updatednew standard can be applied either retrospectively to each prior reporting period presented (i.e., full retrospective adoption) or with the cumulative effect of initially applying the update recognized at the date of the initial application (i.e., modified retrospective adoption) along with additional disclosures. This new standard will replace most of the existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued an update to defer the effective date of this update by one year.effective. The updatednew standard, as amended, becomes effective for the Company in the first quarter of fiscal year 2018, but allows the Company to adopt the standard one year earlier if it so chooses. The Company has not yet selected a transitioncurrently anticipates adopting this standard using the full retrospective method to restate each prior period presented. The Company is evaluating the timing and isthe impact of adopting this standard to its Condensed Consolidated Financial Statements.


currently evaluating the effect that the updated standard will have on its unaudited Condensed Consolidated Financial Statements and related disclosures, and is therefore unable to determine the impact on the Company's unaudited Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which seeks to increase transparency and comparability among organizations by, among other things, recognizing lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous GAAP and disclosing key information about leasing arrangements. For public entities, ASU No. 2016-02 becomes effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the provisions of ASU No. 2016-02 and assessing the impact, if any, it may have on the Company’s unaudited Condensed Consolidated Financial Statements.

In MarchJune 2016, the FASB issued ASU No. 2016-09,2016-13, Improvements to Employee Share-Based Payment AccountingFinancial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, intended to improve the accounting for share-based payment transactions as part of its simplification initiative.. The new guidance mainly requires entitiesamends the impairment model to record all excess tax benefits and tax deficiencies asutilize an income tax benefit or expenseexpected loss methodology in place of the income statement. Thecurrently used incurred loss methodology, which will result in more timely recognition of excess tax benefits and deficiencies and changes to diluted earnings per share are to be applied prospectivelywhile a cumulative-effective adjustment in retained earnings would be made for tax benefits that had not previously been recognized and potential changes to forfeiture recognition.  Cash flow presentation changes can be applied prospectively or retrospectively. Thelosses. ASU isNo. 2016-13 has an effective fordate of the fiscal years beginning after December 15, 2016, with early adoption permitted. Upon adoption, the ASU may result in approximately $7.5 million cumulative-effect adjustment in retained earnings associated with tax benefits that were not previously recognized.2019, including interim periods within those fiscal years. The Company is continuing to evaluatecurrently evaluating ASU 2016-13 and assessing the impact, ofif any, it may have to the updated standard on itsCompany’s consolidated results of operations, financial position and cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard provides for specific guidance how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods with those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating ASU 2016-15 and assessing the impact, if any, it may have to the Company’s Condensed Consolidated Statement of Cash Flows.

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. The new standard is effective for public business entities for annual periods beginning after December 15, 2017 (i.e. 2018 for a calendar-year entity). Early adoption is permitted for all entities as of the beginning of an annual period. The guidance is to be applied using a modified retrospective approach with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. The Company is currently analyzing the impact of ASU No. 2016-16 on the Company’s Condensed Consolidated Financial Statements.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires entities to show the changes in total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions on the balance sheet. The reconciliation can either be presented either on the face of the statement of cash flows or in the notes to the financial statements.  The new standard is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods therein and is to be applied retrospectively. Early adoption is permitted. The Company is currently analyzing the impact of ASU No. 2016-18 on the Company’s Condensed Consolidated Financial Statements.

2. Net Income per Share
  Three Months Ended
  March 31,
Net Income per Basic and Diluted Share: 2016 2015
 (in thousands except per share amounts)
    
Numerator    
Income used to compute net income per basic and diluted share $55,887
 $84,498
     
Denominator  
  
Total weighted average shares used to compute net income per basic share 163,701
 162,829
Restricted stock outstanding 134
 28
Effect of dilutive stock options —
 18
Assumed conversion of Series 2012 Notes —
 666
Assumed conversion of warrants —
 1,927
Assumed conversion of May 2015 Notes —
 4,944
Shares used to compute net income per diluted share 163,835
 170,412
     
Net income per share - basic $0.34
 $0.52
Net income per share - diluted $0.34
 $0.50
  Three Months Ended
  March 31,
Net Income per Basic and Diluted Share: 2017 2016
 (in thousands except per share amounts)
    
Numerator    
Income attributable to PDL’s shareholders used to compute net income per basic and diluted share $7,241
 $55,887
     
Denominator  
  
Total weighted average shares used to compute net income attributable to PDL’s shareholders, per basic share 163,745
 163,701
Restricted stock outstanding 247
 134
Shares used to compute net income attributable to PDL’s shareholders, per diluted share 163,992
 163,835
     
Net income attributable to PDL’s shareholders per share - basic $0.04
 $0.34
Net income attributable to PDL’s shareholders per share - diluted $0.04
 $0.34

We compute

The Company computes net income per diluted share using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of net income per diluted share include shares that may be issued under ourpursuant to outstanding stock options and restricted stock awards, the Series 20124.0% Convertible Senior Notes due February 1, 2018 (the “February 2018 Notes”) and the May 20152.75% Convertible Senior Notes due December 1, 2021 (the “December 2021 Notes”), in each case, 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 the February 2015 Notes was exchanged for the Series 2012 Notes, and in the third quarter of 2013, $1.0 million aggregate principal of the February 2015 Notes was exchanged for the Series 2012 Notes and the February 2015 Notes were retired. In the first quarter of 2014, $131.7 million aggregate principal of the Series 2012 Notes was retired in a privately negotiated exchange and purchase agreement, and in the fourth quarter of 2014, the Company entered into a privately negotiated exchange agreement under which it retired approximately $26.0 million in principal of the outstanding Series 2012 Notes. In the first quarter of 2015, the Company completed the retirement of the remaining $22.3 million of aggregate principal of its Series 2012 Notes.



In May 2011, we issued the May 2015February 2018 Notes and in January and February 2012 we issued the Series 2012 Notes. The Series 2012 Notes and May 2015 Notes were 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 the Series 2012 Notes and May 2015 Notes, shown in the table above, include the shares issuable in respect of such excess.

In the second quarter of 2015, the Company completed the retirement of the remaining $155.1 million of aggregate principal of its May 2015 Notes. Concurrently with the retirement of the May 2015 Notes, we exercised our purchased call options and received 5.2 million of PDL's common shares, which was the amount equal to the number of shares required to be delivered by us to the note holders for the excess conversion value (Note 9).

May 2015 Notes PurchasePurchased Call Option and Warrant Potential Dilution

WeThe Company excluded from ourits calculation of net income per diluted share zero and zero shares for the three months ended March 31, 2016 and 2015, respectively, for warrants issued in 2011, because the exercise price of the warrants was lower than the average market price of our common stock and thus, no stock was issuable upon conversion. Our purchased call options, issued in 2011, will always be anti-dilutive and therefore zero and 27.1 million shares were excluded from our calculations of net income per diluted share for the three months ended March 31, 2016 and 2015, respectively, because they have no effect on net income per diluted 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 23.812.2 million and 29.023.8 million shares for the three months ended March 31, 2017 and 2016, and 2015,respectively, for warrants issued in February 2014, because the exercise price of the warrants exceeded the VWAPvolume-weighted average share price (“VWAP”) of ourthe Company’s common stock and conversion of the underlying February 2018 Notes is not assumed, therefore no stock would be issuable upon conversion. Theseconversion; however, these securities could be dilutive in future periods. OurThe purchased call options issued in February 2014 will always be anti-dilutive andanti-dilutive; therefore 26.913.8 million and 32.726.9 million shares were excluded from ourthe calculation of net income per diluted share for the three months ended March 31, 2017 and 2016, respectively, and 2015, because they have no effect onwere excluded from the calculation of net income per diluted share. For information related to the conversion rates on ourthe Company’s convertible debt, see Note 9.12.

December 2021 Notes Capped Call Potential Dilution

In November 2016, the Company issued $150.0 million in aggregate principal of the December 2021 Notes, which provide in certain situations for the conversion of the outstanding principal amount of the December 2021 Notes into shares of the Company’s common stock at a predefined conversion rate. See Note 12, “Convertible Notes and Term Loans”, for additional information. In conjunction with the issuance of the December 2021 Notes, the Company entered into a capped call transaction with a hedge counterparty. The capped call transaction is expected generally to reduce the potential dilution, and/or offset, to an extent, the cash payments the Company may choose to make in excess of the principal amount, upon conversion of the December 2021 Notes. The Company has excluded the capped call transaction from the diluted EPS computation as such securities would have an antidilutive effect and those securities should be considered separately rather than in the aggregate in determining whether their effect on diluted EPS would be dilutive or antidilutive. For additional information regarding the capped call transaction related to the Company’s December 2021 Notes, see Note 12.

Anti-Dilutive Effect of Stock Options and Restricted Stock Awards

For the three months ended March 31, 2017 and 2016, and 2015, wethe Company excluded approximately 1,039,0001,719,000 and 233,0001,039,000 shares underlying restricted stock awards, respectively, calculated on a weighted average basis, from ourits net income per diluted share calculations because their effect was anti-dilutive.

 3. Fair Value Measurements

The fair value of ourthe Company’s financial instruments are estimates of the amounts that would be received if wethe Company 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 ourthe Company’s financial instruments measured at fair value on a recurring basis by level within the valuation hierarchy.
 March 31, 2016 December 31, 2015 March 31, 2017 December 31, 2016
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
(In thousands)                                
Financial assets:                                
Money market funds $199,546
 $—
 $—
 $199,546
 $94,801
 $—
 $—
 $94,801
 $45
 $—
 $—
 $45
 $4
 $—
 $—
 $4
Corporate securities —
 1,306
 —
 1,306
 —
 1,469
 —
 1,469
Foreign currency hedge contracts —
 —
 —
 —
 —
 2,802
 —
 2,802
Certificates of deposit —
 75,000
 —
 75,000
 —
 75,000
 —
 75,000
Commercial paper —
 19,991
 —
 19,991
 —
 19,987
 —
 19,987
Warrants —
 656
 443
 1,099
 —
 984
 —
 984
 —
 178
 —
 178
 —
 78
 —
 78
Royalty rights - at fair value —
 —
 354,881
 354,881
 —
 —
 399,204
 399,204
 —
 —
 293,801
 293,801
 —
 —
 402,318
 402,318
Total $199,546
 $1,962
 $355,324
 $556,832
 $94,801
 $5,255
 $399,204
 $499,260
 $45
 $95,169
 $293,801
 $389,015
 $4
 $95,065
 $402,318
 $497,387
                
Financial liabilities:  
  
    
  
  
    
Anniversary payment $—
 $—
 $88,493
 $88,493
 $—
 $—
 $88,001
 $88,001
Contingent consideration —
 —
 43,600
 43,600
 —
 —
 42,650
 42,650
Total $—
 $—
 $132,093
 $132,093
 $—
 $—
 $130,651
 $130,651
 
As of March 31, 2017, the Company held $75.0 million in a short-term certificate of deposit, which is designated as cash collateral for the letter of credit issued with respect to the first anniversary payment under the Noden Purchase Agreement. There have been no transfers between levels during each of the three-month periods ended March 31, 2016,2017 and December 31, 20152016. The Company recognizes transfers between levels on the date of the event or change in circumstances that caused the transfer.

Corporate SecuritiesCertificates of Deposit

CorporateThe fair value of the certificates of deposit is determined using quoted market prices for similar instruments and non-binding market prices that are corroborated by observable market data.

Commercial Paper

Commercial paper securities consist primarily of U.S. corporate equitydebt holdings. The fair value of corporatecommercial paper securities is estimated using recently executed transactions or market quoted prices, where observable. Independent pricing sources are also used for valuation.

Warrants

Warrants consist primarily of purchased call options to buy U.S. corporate equity holdings and derivative assets acquired as part of note receivable investments. The fair value of the warrants is estimated using recently quoted market prices or estimated fair value of the underlying equity security and the Black-Scholes option pricing model.

Royalty Rights - At Fair Value

Depomed Royalty Agreement

On October 18, 2013, PDLthe Company entered into the Royalty Purchase and Sale Agreement (the “Depomed Royalty Agreement”) with Depomed, Royalty Agreement,Inc. and Depo DR Sub, LLC (together, “Depomed”), 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, Inc. (“Santarus”) (which was subsequently acquired by Salix Pharmaceuticals, Inc. (“Salix), which itself was recently acquired by Valeant Pharmaceuticals)Pharmaceuticals International, Inc. (“Valeant”)) with respect to sales of Glumetza (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. with respect to sales of Janumet® XR (sitagliptin and


metformin HCL extended-release tablets); (c) from Janssen Pharmaceutica N.V. with respect to potential future development milestones and sales of its investigationalrecently approved fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin tablets;tablets, marketed as Invokamet XR®; (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;Ingelheim, including its recently approved product, Jentadueto XR®; and (e) from LG Life Sciences and Valeant Pharmaceuticals for sales of extended-release metformin tablets in Korea and Canada, respectively.

Under the terms of the Depomed Royalty Agreement, the Company receives 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 March 31, 2016,2017, and December 31, 2015,2016, the Company determined that its royalty purchase interest in Depo DR Sub represented a variable interest in a variable interest entity. However, the Company does not have the power to direct the


activities of Depo DR Sub that most significantly impact Depo DR Sub'sSub’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 financial asset acquired represents a single unit of accounting. The fair value of the financial 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 financial asset is classified as a Level 3 asset within the fair value hierarchy, as ourthe Company’s valuation utilized significant unobservable inputs, including estimates as to the probability and timing of future commercialization for products not yet approved by the FDAU.S. Food and Drug Administration (“FDA”) or other regulatory agencies. The discounted cash flows are based upon expected royalties from sales of licensed products over an eight-yeara nine-year period. The discount rates utilized range from approximately 21%15% to 25%. Significant judgment is required in selecting appropriate discount rates. At March 31, 2016,2017, an evaluation was performed to assess those rates and general market conditions potentially affecting the fair market value. Should these discount rates increase or decrease by 2.5%, the fair value of the asset could decrease by $7.6$12.2 million or increase by $8.5$13.9 million, respectively. A third-party expert was engaged to help management develop its original estimate of the expected future cash flows. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. WeThe Company periodically assessassesses the expected future cash flows and to the extent such payments are greater or less than ourits initial estimates, or the timing of such payments is materially different than ourthe original estimates, wethe Company will adjust the estimated fair value of the asset. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $3.6 million or decrease by $3.6$4.0 million, respectively.

When PDLthe Company acquired the Depomed royalty rights, Glumetza was marketed by Santarus. In January 2014, Salix acquired Santarus and assumed responsibility for commercializing Glumetza, which was generally perceived to be a positive development because of Salix'sSalix’s larger sales force and track record in the successful commercialization of therapies. In late 2014, Salix made a number of disclosures relating to an excess of supply at the distribution level of Glumetza and other drugs that it commercialized and the practices leading to this excess of supply which were under review by Salix'sSalix’s audit committee in relation to the related accounting practices. Because of these disclosures and PDL'sthe Company’s lack of direct access to information as to the levels of inventory of Glumetza in the distribution channels, PDLthe Company commenced a review of all public statements by Salix, publicly available historical third-party prescription data, analyst reports and other relevant data sources. PDLThe Company also engaged a third-party expert to specifically assess estimated inventory levels of Glumetza in the distribution channel and to ascertain the potential effects those inventory levels may have on expected future cash flows. Salix was acquired by Valeant Pharmaceuticals in early April 2015. In mid-2015, Valeant Pharmaceuticals implemented two price increases on Glumetza. At year-end 2015, a third-party expert was engaged by PDLthe Company to assess the impact of the Glumetza price adjustments and near-term market entrance of manufacturer of generic equivalents to Glumetza to the expected future cash flows. Management revised basedBased on the analysis performed, management revised the underlying assumptions used in the discounted cash flow analysis at year-end 2015. In February and August of 2016, a manufacturertotal of three generic equivalents to Glumetza entered the market. At MarchDecember 31, 2016, management evaluated,re-evaluated, with assistance of a third-party expert, the erosion of market share data, the gross-to-net revenue adjustment assumptions and Glumetza demand data. These data and assumptions are based on available but limited data. Ourinformation. The Company’s expected future cash flows at year-end 2015 anticipated a reduction in future cash flowsas of Glumetza as a result of the generic competition in 2016. However,March 31, 2017 have been adjusted based on the most recent demand and supply data of Glumetza it appears that the loss of market share progressed more rapidly than forecasted at year-end 2015.Glumetza.

As of March 31, 2016, our2017, the Company’s discounted cash flow analysis reflects ourits expectations as to the amount and timing of future cash flows up to the valuation date. We continueThe Company continues to monitor whether the generic competition further affects sales of Glumetza and thus royalties on such sales paid to PDL.the Company. Due to the uncertainty around Valeant'sValeant’s marketing and


pricing strategy, as well as the recent generic competition and limited historical demand data after generic market entrance, wethe Company may need to further reduce future cash flows in the event of more rapid reduction in market share of Glumetza. PDLGlumetza or a further erosion in net pricing. In January 2016, the Company exercised its audit right under the Depomed Royalty Agreement with respect to the Glumetza royalties in January 2016royalties. The information initially provided by Valeant to the independent auditors engaged to perform the royalty audit was substantially incomplete, and expectsthe Company has since identified the information necessary to concludecomplete the audit to Valeant and is awaiting the provision of the necessary and missing information.

On May 31, 2016, the Company obtained a notification indicating that the FDA approved Jentadueto XR for use in patients with Type 2 diabetes. In June 2016, the Company received a $6.0 million FDA approval milestone. The product approval was earlier than initially expected. Based on the FDA approval and anticipated timing of the product launch, the Company adjusted the timing of future cash flows and discount rate used in the second halfdiscounted cash flow model at June 30, 2016. At December 31, 2016, management re-evaluated, with assistance of 2016.a third-party expert, the cash flow assumptions for Jentadueto XR and revised the discounted cash flow model. As of March 31, 2017, the Company’s discounted cash flow analysis reflects its expectations as to the amount and timing of future cash flows up to the valuation date.

On September 21, 2016, the Company obtained a notification indicating that the FDA approved Invokamet XR for use in patients with Type 2 diabetes. The product approval triggered a $5.0 million approval milestone payment to the Company. Based on the FDA approval and timing of the product launch, the Company adjusted the timing of future cash flows and discount rate used in the discounted cash flow model at March 31, 2017.

On December 13, 2016, the Company obtained a notification indicating that the FDA approved Synjardy XR for use in patients with Type 2 diabetes. The product approval triggered a $6.0 million approval milestone payment to the Company. Based on the FDA approval and expected product launch, the Company adjusted the timing of future cash flows and discount rate used in the discounted cash flow model at March 31, 2017. In April 2017, Boehringer Ingelheim launched Synjardy XR.

As of March 31, 2016,2017, the fair value of the asset acquired as reported in ourthe Company’s Condensed Consolidated Balance Sheet was $143.9$161.6 million and the maximum loss exposure was $143.9$161.6 million.

VB Royalty Agreement

On June 26, 2014, PDLthe Company entered into the VBa Royalty Purchase and Sale Agreement (the “VB Royalty Agreement”) with Viscogliosi Brothers, LLC (“VB”), whereby VB conveyed to the Company the right to receive royalties payable on sales of a spinal implant that has received pre-market approval from the FDA, in exchange for a $15.5 million cash payment, less fees.

The royalty rights acquired includes royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company receives 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 tenths2.3 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 chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement were negotiated separately.

The fair value of the royalty right at March 31, 2016,2017, 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 ourthe Company’s 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 an eight-yeara 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 $1.2 million or increase by $1.4 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $0.4 million or decrease by $0.4 million, respectively. A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from ourthe Company’s estimates. At each reporting period, an evaluation is performed to assess those estimates, discount rates utilized and general market conditions affecting fair market value.

As of March 31, 2016,2017, the fair value of the asset acquired as reported in ourthe Company’s Condensed Consolidated Balance Sheet was $17.3$15.2 million and the maximum loss exposure was $17.3$15.2 million.



U-M Royalty Agreement

On November 6, 2014, PDLthe Company acquired a portion of all royalty payments of the U-M’sRegents of the University of Michigan’s (“U-M”) worldwide royalty interest in Cerdelga (eliglustat) for $65.6 million pursuant to the Royalty Purchase and Sale Agreement with U-M (the “U-M Royalty Agreement”). Under the terms of the MichiganU-M Royalty Agreement, PDLthe Company will receive 75% of all royalty payments due under U-M’s license agreement with Genzyme Corporation, a Sanofi company (“Genzyme”) until expiration of the licensed patents, excluding any patent term extension. Cerdelga, an oral therapy for adult patients with Gaucher disease type 1, was developed by Genzyme, a Sanofi company.Genzyme. Cerdelga was approved in the United States on August 19, 2014, in the European Union on January 22, 2015, and in Japan in March 2015. In addition, marketing applications for Cerdelga are under review by other regulatory authorities. While marketing applications have been approved in the European Union and Japan, national pricing and reimbursement decisions are delayed in some countries. At June 30, 2016, a third-party expert was engaged by the Company to assess the impact of the delayed pricing and reimbursement decisions to Cerdelga’s expected future cash flows. Based on the analysis performed, management revised the underlying assumptions used in the discounted cash flow analysis at period end.

The fair value of the royalty right at March 31, 2016,2017 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 ourthe Company’s 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 seven-yearsix-year period. The discount rate utilized was approximately 12.8%. 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 $5.6$2.3 million or increase by $6.3$2.5 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.8 million or decrease by $1.8$0.9 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from ourthe Company’s estimates. An evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period.

As of March 31, 2016,2017, the fair value of the asset acquired as reported in ourthe Company’s Condensed Consolidated Balance Sheet was $71.6$35.7 million and the maximum loss exposure was $71.6$35.7 million.

ARIAD Royalty Agreement

On July 28, 2015, PDLthe Company entered into the revenue interest assignment agreement (the “ARIAD Royalty Agreement”) with ARIAD Royalty Agreement,Pharmaceuticals, Inc. (“ARIAD”), whereby the Company acquired the rights to receive royalties payable from ARIAD'sARIAD’s net revenues generated by the sale, distribution or other use of Iclusig® (ponatinib), a cancer medicine for the treatment of adult patients with chronic myeloid leukemia, in exchange for up to $200.0 million in cash payments. The purchase price of $100.0 million iswas payable in two tranches of $50.0 million each, with the first tranche having been funded on the closing dateJuly 28, 2015 and the second tranche to behaving been funded on the 12-month anniversary of the closing date. The ARIAD Royalty Agreement provides ARIAD with an option to draw up to an additional $100.0 million in up to two draws at any time between the six- and 12-month anniversaries of the closing date. ARIAD may repurchase the royalty rights at any time for a specified amount.July 28, 2016. Upon the occurrence of certain events, PDL hasincluding a change of control of ARIAD, the Company had the right to require ARIAD to repurchase the royalty rights for a specified amount. Under the ARIAD Royalty Agreement, theThe Company has the right to a make-whole payment from ARIAD if the Company does not receive payments equal to or greater than the amounts funded on or prior to the fifth anniversary of each of the respective fundings. In such case, ARIAD will pay to the Company the difference between the amounts paid to such date by ARIAD (excluding any delinquent fee payments) and the amounts funded by the Company. PDL has elected the fair value


option to account for the hybrid instrument in its entirety. Any embedded derivative shall not be separated from the host contract.

Under the terms of the ARIAD Royalty Agreement, the Company receives royalty payments at a royalty rate ranging from 2.5% to 7.5% of Iclusig revenue until the first to occur of (i) repurchase of the royalty rights by ARIAD or (ii) December 31, 2033. The annual royalty payments shall not exceed $20.0 million in any fiscal year for the years ended December 31, 2015 through December 31, 2018. If Iclusig revenue does not meet certain agreed-upon projections on an annual basis, PDL is entitled to certain royalty payments from net revenue of another ARIAD product, brigatinib, up to the amount of the shortfall from the projections for the applicable year. 

The asset acquired pursuant to the ARIAD Royalty Agreement represents a single unit of accounting.

In January 2017, Takeda Pharmaceutical Company Limited (“Takeda”) announced that it had entered into a definitive agreement to acquire ARIAD. The fair valueacquisition was consummated on February, 16, 2017 and the Company exercised its put option on the same day, which resulted in an obligation by Takeda to pay the Company a 1.2x multiple of the $100.0 million funded by the Company under the ARIAD Royalty Agreement, less royalty right at March 31, 2016, was determinedpayments already received 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 seven-year period. The discount rate utilized was approximately 10.0%. 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 $7.9 million or increase by $9.1 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.3 million or decrease by $1.3 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. 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 affecting fair market value is performed in each reporting period.Company.

AsOn March 30, 2017, Takeda fulfilled its obligations under the put option and paid the Company the repurchase price of March 31, 2016,$108.2 million for the fair value ofroyalty rights under the asset acquired as reported in our Condensed Consolidated Balance Sheet was $50.2 million and the maximum loss exposure was $50.2 million.ARIAD Royalty Agreement.

AcelRx Royalty Agreement

On September 18, 2015, PDLthe Company entered into the AcelRxa royalty interest assignment agreement (the “AcelRx Royalty AgreementAgreement”) with ARPI LLC, a wholly owned subsidiary of AcelRx Pharmaceuticals, Inc. (“AcelRx”), whereby the Company acquired the rights to receive a portion of the royalties and certain milestone payments on sales of Zalviso™® (sufentanil sublingual tablet system) in the European Union, Switzerland and Australia by AcelRx'sAcelRx’s commercial partner, Grünenthal, in exchange for a $65.0 million cash payment. Under the terms of the AcelRx Royalty Agreement, the Company will receive 75% of all royalty payments and 80% of the first four commercial milestone payments due under AcelRx'sAcelRx’s license agreement with Grünenthal until the earlier to occur of (i) receipt by the Company of payments equal to three times the cash payments made to AcelRx and


(ii) the expiration of the licensed patents. Zalviso received marketing approval by the European Commission in September 2015. Grüenthal is expected to launchnenthal launched Zalviso in the Secondsecond quarter of 2016 and PDL will begin receivingthe Company started to receive royalties shortly thereafter.in the third quarter of 2016.

As of March 31, 2016,2017, and December 31, 2015,2016, the Company determined that its royalty rights under the agreement with ARPI LLCAcelRx Royalty Agreement represented a variable interest in a variable interest entity. However, the Company does not have the power to direct the activities of ARPI LLC that most significantly impact ARPI LLC'sLLC’s economic performance and is not the primary beneficiary of ARPI LLC; therefore, ARPI LLC is not subject to consolidation by the Company.

The fair value of the royalty right at March 31, 2016,2017 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 ourthe Company’s 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 fifteen-yearfourteen-year period. The discount rate utilized was approximately 13.4%. 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 $10.2 million or increase by $12.8 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.7 million or decrease by $1.7 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from ourthe Company’s estimates. At each reporting period, an evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period.

As of March 31, 2016,2017, the fair value of the asset acquired as reported in ourthe Company’s Condensed Consolidated Balance Sheet was $69.6 million and the maximum loss exposure was $69.6 million.



Dr. Stephen Hoffman is the President of 10x Capital, Inc., a third-party consultant to the Company, and is also a member of the board of directors of AcelRx. Dr. Hoffman recused himself from the AcelRx board of directors with respect to the entirety of its discussions and considerations of the transaction. Dr. Hoffman is beingwas compensated for his contribution to consummate this transaction by PDLthe Company as part of his consulting agreement. PDLagreement with the Company. The Company concluded Dr. Hoffman is not considered a related party in accordance with FASB ASCAccounting Standard Codification (“ASC”) 850, Related Party Disclosures and SEC Regulation S-X, Related Party Transactions Which Affect the Financial Statements.

Avinger Credit and Royalty Agreement

On April 18, 2013, PDLthe Company entered into the AvingerCredit Agreement (the “Avinger Credit and Royalty Agreement,Agreement”) with Avinger, Inc. (“Avinger”), under which wethe Company made available to Avinger up to $40.0 million (of which only $20.0 million was funded) to be used by Avinger in connection with the commercialization of its lumivascular catheter devices and the development of Avinger'sAvinger’s lumivascular atherectomy device. On September 22, 2015, Avinger elected to prepay the note receivable in whole (including interest and a prepayment fee) for a payment of $21.4 million in cash.

Under the terms of the Avinger Credit and Royalty Agreement, the Company was entitled to receive royalties at a rate of 1.8% on Avinger'sAvinger’s net revenues until the note receivable was repaid by Avinger. Upon the repayment of the note receivable by Avinger, which occurred on September 22, 2015, the royalty rate was reduced to 0.9%, subject to certain minimum payments from the prepayment date until April 2018. The Company has accounted for the royalty rights in accordance with the fair value option. The fair value of the royalty right at March 31, 2016,2017 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 ourthe Company’s 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 two-yearone-year period. The discount rate utilized was approximately 15.0%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 5%, the fair value of this asset could decrease by $113,000$41,000 or increase by $126,000,$44,000, respectively. Should the expected royalties increase or decrease by 5%, the fair value of the asset could increase by $116,000 or decrease by $116,000,$35,000, respectively. Management considered the contractual minimum payments when developing 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 ourthe Company’s estimates. An evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period.

As of March 31, 2016,2017, the fair value of the royalty asset as reported in ourthe Company’s Condensed Consolidated Balance Sheet was $2.3$1.4 million and the maximum loss exposure was $2.3$1.4 million.



Kybella Royalty Agreement

On July 8, 2016, the Company entered into a royalty purchase and sales agreement with an individual, whereby the Company acquired that individual’s rights to receive certain royalties on sales of KYBELLA® by Allergan, in exchange for a $9.5 million cash payment and up to $1.0 million in future milestone payments based upon product sales targets. The Company started to receive royalty payments during the third quarter of 2016.

The fair value of the royalty right at March 31, 2017, 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 the Company’s 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 a licensed product over a nine-year period. The discount rate utilized was approximately 14.4%. 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 $1.0 million or increase by $1.2 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase or decrease by $258,000, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from the Company’s estimates. At each reporting period, an evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period.

As of March 31, 2017, the fair value of the asset acquired as reported in the Company’s Condensed Consolidated Balance Sheets was $10.3 million and the maximum loss exposure was $10.3 million.

The following tables summarize the changes in Level 3 assets and liabilities and the gains and losses included in earnings for the three months ended March 31, 2016:2017:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Rights Assets  
     
(in thousands) 
Royalty Rights -
At Fair Value
Fair value as of December 31, 2016   $402,318
       
 Financial instruments settled   (108,169)
 Total net change in fair for the period    
  Change in fair value of royalty rights - at fair value $13,146
  
  Proceeds from royalty rights - at fair value $(13,494)  
  Total net change in fair value for the period   (348)
       
Fair value as of March 31, 2017 

 $293,801

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(in thousands) Royalty Rights 
Preferred Stock
Warrants
Fair value as of December 31, 2015 $399,204
 $—
        
 Fair value of financial instruments purchased —
 443
 Total net change in fair value for the period    
  Change in fair value of royalty rights - at fair value (27,102) —
  Proceeds from royalty rights - at fair value (17,221) —
   Total net change in fair value for the period (44,323) —
        
Fair value as of March 31, 2016 $354,881
 $443
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Royalty Rights Assets
         
  Fair Value as of Change of Royalty Rights - Fair Value as of
(in thousands) December 31, 2016 Ownership Change in Fair Value March 31, 2017
Depomed $164,070
 $—
 $(2,432) $161,638
VB 14,997
 —
 174
 15,171
U-M 35,386
 —
 299
 35,685
ARIAD 108,631
 (108,169) (462) —
AcelRx 67,483
 —
 2,113
 69,596
Avinger 1,638
 —
 (248) 1,390
KYBELLA 10,113
 —
 208
 10,321
  $402,318
 $(108,169) $(348) $293,801


Fair Value Measurements Using Significant Unobservable Inputs (Level 3) - Liabilities
     
(in thousands) Anniversary Payment Contingent Consideration
Fair value as of December 31, 2016 $(88,001) $(42,650)
       
 Total net change in fair for the period (492) (950)
       
Fair value as of March 31, 2017 $(88,493) $(43,600)

The fair value of the contingent consideration was determined using an income approach derived from the Noden Products revenue estimates and a probability assessment with respect to the likelihood of achieving (a) the level of net sales or (b) generic product launch that would trigger the milestone payments. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. The fair value of the contingent consideration is remeasured each reporting period, with changes in fair value recorded in the Condensed Consolidated Statements of Income. The change in fair value of the contingent consideration during the period ending March 31, 2017 is due primarily to the passage of time, as there have been no significant changes in the key assumptions used in the fair value calculation during the current period.

Gains and losses from changes in Level 3 assets included in earnings for each period are presented in "Royalty“Royalty rights - change in fair value"value” and gains and losses from changes in Level 3 liabilities included in earnings for each period are presented in “Change in fair value of anniversary payment and contingent consideration” as follows:

 Three Months Ended Three Months Ended
 March 31, March 31,
(in thousands) 2016 2015 2017 2016
        
Total change in fair value for the period included in earnings for assets held at the end of the reporting period $(27,102) $11,362
Total change in fair value for the period included in earnings for royalty right assets held at the end of the reporting period $13,146
 $(27,102)
    
Total change in fair value for the period included in earnings for liabilities held at the end of the reporting period $(1,442) $—

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.

Warrants

Warrants consist primarily of purchased call options to buy U.S. corporate equity holdings and derivative assets acquired as part of note receivable investments. The fair value of the warrants is estimated using recently quoted market prices or estimated fair value of the underlying equity security and the Black-Scholes option pricing model.

The following tables present the fair value of assets and liabilities not subject to fair value recognition by level within the valuation hierarchy:

 March 31, 2016 December 31, 2015 March 31, 2017 December 31, 2016
 Carrying Value 
Fair Value
Level 2
 
Fair Value
Level 3
 Carrying Value 
Fair Value
Level 2
 
Fair Value
Level 3
 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
 $—
 $53,670
 $50,191
 $—
 $55,970
 $50,191
 $—
 $51,397
 $50,191
 $—
 $52,260
Hyperion note receivable 1,200
 —
 1,200
 1,200
 —
 1,200
 1,200
 —
 1,200
 1,200
 —
 1,200
LENSAR note receivable 43,909
 —
 44,573
 42,271
 —
 42,618
 43,909
 —
 43,900
 43,909
 —
 43,900
Direct Flow Medical note receivable(1) 56,934
 —
 56,640
 51,852
 —
 51,992
 —
 —
 —
 10,000
 —
 10,000
Paradigm Spine note receivable 54,151
 —
 55,023
 53,973
 —
 54,250
kaléo note receivable 146,754
 —
 145,533
 146,778
 —
 146,789
 146,670
 —
 143,511
 146,685
 —
 142,539
CareView note receivable 18,717
 —
 20,128
 18,640
 —
 19,495
 19,055
 —
 20,035
 18,965
 —
 19,200
Total $371,856
 $—
 $376,767
 $364,905
 $—
 $372,314
 $261,025
 $—
 $260,043
 $270,950
 $—
 $269,099
                        
Liabilities:  
  
  
  
  
  
  
  
  
  
  
  
February 2018 Notes $230,850
*$220,570
 $—
 $228,862
*$197,946
 $—
 $122,692
 $123,918
 $—
 $121,595
 $123,918
 $—
March 2015 Term Loan —
 —
 —
 24,966
 —
 25,000
December 2021 Notes 112,426
 132,096
 —
 110,848
 122,063
 —
Total $230,850
 $220,570
 $—
 $253,828
 $197,946
 $25,000
 $235,118
 $256,014
 $—
 $232,443
 $245,981
 $—
* Effective January 1, 2016, the Company adopted ASU 2015-03 and changed its method of presentation relating to debt issuance cost. Prior to 2016, the Company's policy was to present these costs in other assets on the consolidated balance sheet, net of accumulated amortization. Beginning in 2016, the Company has presented these fees as a direct deduction to the related debt.
(1) As a result we reclassified $3.5 millionof the foreclosure proceedings, the Company obtained ownership of most of the Direct Flow Medical assets through the Company’s wholly-owned subsidiary, DFM, LLC. Those assets are held for sale and $4.0 millioncarried at the lower of deferred financing costscarrying amount or fair value, less estimated selling cost, as of March 31, 2016 and December 31, 2015, respectively, from other assets, which are currently presented as2017. For a direct deduction to the February 2018 Notes.further discussions on this topics, see Note 7.

As of March 31, 20162017 and December 31, 20152016, the estimated fair values of our Paradigm Spine note receivable,the kaléo, Inc. note receivable, Hyperion note receivable, AvingerCatalysis International, Inc. note receivable, LENSAR, note receivable, CareViewInc. note receivable and Direct Flow MedicalCareView Communications Inc. 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 differed from 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.

When deemed necessary, we engagethe Company engages a third-party valuation expert to assist in evaluating ourits investments and the related inputs needed for us to estimate the fair value of certain investments. WeThe Company determined ourits notes receivable assets are Level 3 assets as ourthe Company’s 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, wethe Company 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 Wellstat Diagnostics Note Receivable and Credit Agreement, as amended and restated,note receivable is secured by substantially all assets and equity interests in Wellstat Diagnostics. In addition, the note is subject to a guaranty from the Wellstat Diagnostics Guarantors. The Direct Flow Medical note receivable and LENSAR, Inc. note receivable are secured by substantially all assets in the respective companies. The estimated fair value of the collateral assets was determined by using an asset approach and discounted cash flow model related to the underlying collateral and was adjusted to consider estimated costs to sell the assets.

On March 31, 2016,2017, the carrying values of several of ourthe Company’s notes receivable differed from their estimated fair value. This is the result of discount rates used when performing a discounted cash flow for fair value valuation purposes. WeThe Company determined these notes receivable to be Level 3 assets, as ourits valuations utilized significant unobservable inputs, estimates of future revenues, expectations about settlement and required yield. To provide support for the fair value measurements, wethe Company considered forward-looking performance, and current measures associated with high yield and published 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 ourthe Company’s convertible notes were determined using quoted market pricing or dealer quotes.



The following table represents significant unobservable inputs used in determining the estimated fair value of impaired notes receivable investments:
Asset 
Valuation
Technique
 
Unobservable
Input
 March 31, 2017 
December 31,
2016
         
Wellstat Diagnostics        
Intellectual Property Income Approach      
    Discount rate 13% 13%
    Royalty amount $55-74 million $54-74 million
Real Estate Property Market Approach      
    Annual appreciation rate 4% 4%
    Estimated realtor fee 6% 6%
    Estimated disposal date 12/31/2017 12/31/2017
Direct Flow Medical        
All Assets Income Approach      
    Discount rate N/A 27%
    Implied revenue multiple N/A 6.9
LENSAR        
All Assets Income Approach      
    Discount rate 15.5% 25%
    Implied revenue multiple 1.5-3.0 2.5

At March 31, 2017, the Company had three notes receivable investments on non-accrual status with a cumulative investment cost and fair value of approximately $95.3 million and $96.5 million, respectively, compared to four note receivable investments on non-accrual status at December 31, 2016 with a cumulative investment cost and fair value of approximately $105.3 million and $107.4 million, respectively. For the quarters ended March 31, 2017 and 2016, the Company did not recognize any interest for note receivable investments on non-accrual status. During the three months ended March 31, 2017 and 2016, the Company did not recognize losses on extinguishment of notes receivable.

4. Cash, Cash Equivalents and Short-term Investments
 
As of March 31, 20162017, and December 31, 20152016, wethe Company had invested ourits excess cash balances primarily in money market funds, and a corporate equity security. OurThe Company’s securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses reported in "Accumulated“Accumulated other comprehensive income"income” 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 havethe Company has not experienced credit losses on investments in these instruments, and we doit does not require collateral for ourits 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)            
March 31, 2016            
Cash $91,104
 $—
 $—
 $91,104
 $91,104
 $—
Money market funds 199,546
 —
 —
 199,546
 199,546
 —
Corporate securities 663
 643
 —
 1,306
 —
 1,306
Total $291,313
 $643
 $—
 $291,956
 $290,650
 $1,306
             
December 31, 2015            
Cash $124,082
 $—
 $—
 $124,082
 $124,082
 $—
Money market funds 94,801
 —
 —
 94,801
 94,801
 —
Corporate securities 799
 670
 —
 1,469
 —
 1,469
Total $219,682
 $670
 $—
 $220,352
 $218,883
 $1,469

For the three months ended March 31, 2016 and December 31, 2015, we recognized approximately $136,000 and $997,000, on sales of available-for-sale securities.



The following tables summarize the Company’s cash and available-for-sale securities’ amortized cost, gross unrealized gain ongains, gross unrealized losses, and fair value by significant investment category reported as cash and cash equivalents, or short-term investments included in "Other comprehensive income (loss), net of tax" was approximately $418,000 and $435,000 as of March 31, 2016,2017, and December 31, 2015, respectively.2016:
      Reported as:
   Amortized Cost  Estimated Fair Value  Cash and Cash Equivalents Short-Term Investments
(In thousands)        
March 31, 2017        
Cash $314,282
 $314,282
 $314,282
 $—
Money market funds 45
 45
 45
 —
Commercial paper 19,991
 19,991
 —
 19,991
Total $334,318
 $334,318
 $314,327
 $19,991
         
December 31, 2016        
Cash $147,150
 $147,150
 $147,150
 $—
Money market funds 4
 4
 4
 —
Commercial paper 19,987
 19,987
 —
 19,987
Total $167,141
 $167,141
 $147,154
 $19,987

5. Concentration of Credit Risk

Customer Concentration

The percentage of total revenue recognized, which individually accounted for 10% or more of the Company’s total revenues, was as follows:
    Three Months Ended March 31,
Licensee Product Name 2017 2016
Genentech Avastin —% 38%
  Herceptin —% 38%
  Xolair —% 13%
       
Biogen 
Tysabri®
 31% 14%
       
Depomed Glumetza, Janumet XR, Jentadueto XR and Invokamet XR 14% N/M
       
N/M Tekturna, Tekturna HCT, Rasilez and Rasilez HCT 28% —%
       
kaléo Interest revenues 10% 5%
____________________
N/M = Not meaningful

6. Foreign Currency Hedging

We designateThe Company designates the foreign currency exchange contracts used to hedge ourits royalty revenues based on underlying Euro-denominated sales as cash flow hedges. Euro forward contracts are presented on a net basis on ourthe Company’s Condensed Consolidated Balance Sheets as we haveit has entered into a netting arrangement with the counterparty. As of December 31, 2015, all outstandingAll Euro forward contracts were classified as cash flow hedges. There were no Euro forward contracts outstanding as of March 31, 2017 or December 31, 2016.

In January 2012, we modified our then-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 occurred through December 2014. In October 2014, we entered an additional series of Euro forward contracts covering the quarters in which our licensees' sales occurred through December 2015.

During the third quarter of 2012, we reduced our forecasted exposure to the Euro for 2013 royalties. We de-designated and terminated certain forward contracts, due to our determination that certain cash flows under the de-designated contracts were not probable to occur, and recorded a gain of approximately $391,000 to "Interest and other income, net," which was reclassified from other comprehensive income (loss), net of tax effects. The termination of these contracts was effected through a reduction in the notional amount of the original hedge contracts.

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 December 31, 2015
      (In thousands)
Currency 
Settlement Price
($ per Euro)
 Type Notional Amount Fair Value
Euro 1.260 Sell Euro $16,500
 $2,802
 The location and fair values of our Euro forward contracts in our Condensed Consolidated Balance Sheets were as follows:

Cash Flow Hedge Location March 31,
2016		 December 31,
2015
(In thousands)      
Euro forward contracts Prepaid and other current assets $—
 $2,802

The effect of ourthe Company’s derivative instruments in ourits Condensed Consolidated Statements of Income and ourits Condensed Consolidated Statements of Comprehensive Income were as follows:

 Three Months Ended Three Months Ended
 March 31, March 31,
 2016 2015 2017 2016
(In thousands)        
Net gain (loss) recognized in OCI, net of tax (1)
 $—
 $5,668
 $—
 $—
Gain (loss) reclassified from accumulated OCI into "Queen et al. royalty revenue," net of tax (2)
 $1,821
 $669
Gain (loss) reclassified from accumulated OCI into “Queen et al. royalty revenue,” net of tax (2)
 $—
 $1,821
 _______________________________
(1) Net change in the fair value of cash flow hedges, net of tax.
(2) Effective portion classified as royalty revenue.



6.7. Notes and Other Long-Term Receivables

Notes 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$7.5 milliontwo-year two-year senior secured note receivable with the holders of the equity interests in Wellstat Diagnostics.Diagnostics, LLC a/k/a Defined Diagnostics, LLC (“Wellstat Diagnostics”). In addition to bearing interest at 10% per annum, the note receivable gave PDLthe Company certain rights to negotiate for certain future financing transactions. In August 2012, PDLthe Company and Wellstat Diagnostics amended the note receivable, providing a senior secured note receivable of $10.0$10.0 million,, bearing interest at 12% per annum, to replace the original $7.5$7.5 million note receivable. This $10.0$10.0 million note receivable was repaid on November 2, 2012, using the proceeds of the $40.0$40.0 million credit facilityagreement entered into with the Company on the same date.date, as described below.

On November 2, 2012, the Company and Wellstat Diagnostics entered into a $40.0$40.0 million credit agreement pursuant to which the Company was to accrue quarterly interest payments at the rate of 5% per annum (payable in cash or in kind). In addition, PDLthe Company was to receive quarterly royalty payments based on a low double-digit royalty rate of Wellstat Diagnostics'Diagnostics’ net revenues, generated by the sale, distribution or other use of Wellstat Diagnostics'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. PDLThe Company 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, PDLthe Company exercised one of its available remedies and transferred approximately $8.1$8.1 million of available cash from a bank account of Wellstat Diagnostics to PDLthe Company and applied the funds to amounts due under the credit agreement. On February 28, 2013, the parties entered into a forbearance agreement whereby PDLthe Company 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. PDLThe Company agreed to provide up to $7.9$7.9 million to Wellstat Diagnostics to fund the business for the 120-day120-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$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.

On August 15, 2013, the owners and affiliates of Wellstat Diagnostics completed a financing transaction to fulfill Wellstat Diagnostics'Diagnostics’ 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,herein, 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, PDLthe Company was to continue to receive quarterly royalty payments based on a low double-digit royalty rate of Wellstat Diagnostics'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'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 were required to contribute additional capital to Wellstat Diagnostics upon the sale of an affiliate entity. The amended and restated credit agreement had an ultimate maturity date of December 31, 2021 (but has subsequently been accelerated as described below).

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“Interest and other income, net"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 was to be 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 showedshowing that it was generally unable to pay its debts as they became due. This constituteddue, constituting 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 the amended and restated credit agreement with Wellstat Diagnostics. The material terms of the amendment included 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 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 the Wellstata notice of default (the “Wellstat Diagnostics Borrower Notice.Notice”). The Wellstat Diagnostics Borrower Notice accelerated all obligations under the amended and restated credit agreement and demanded immediate payment in full in an amount equal to approximately $53.9$53.9 million, (which amount, in accordance with the terms of the amended and restated credit agreement, included 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 demanded that Wellstat Diagnostics protect and preserve all collateral securing its obligations.

On August 7, 2014, the Company delivered thea notice (the “Wellstat Diagnostics Guarantor Notice”) to each of Samuel J. Wohlstadter, Nadine H. Wohlstadter, Duck Farm, Inc., Hebron Valley Farms, Inc., HVF, Inc., Hyperion Catalysis EU Limited, Hyperion, NHW, LLC, Wellstat AVT Investment, LLC, Wellstat Biocatalysis, LLC, Wellstat Biologics Corporation, Wellstat Diagnostics, Guarantor Notice.Wellstat Immunotherapeutics, LLC, Wellstat Management Company, LLC, Wellstat Opthalmics Corporation, Wellstat Therapeutics Corporation, Wellstat Therapeutics EU Limited, Wellstat Vaccines, LLC and SJW Properties, Inc., the guarantors of Wellstat Diagnostics’ obligations to the Company (collectively, the “Wellstat Diagnostics Guarantors”) under the credit agreement. The Wellstat Diagnostics Guarantor Notice included 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, including Wellstat Therapeutics and Wellstat Diagnostics’ stockholders.

On August 21, 2014, the Company entered into the second amendment to the amended and restated credit agreement with Wellstat Diagnostics, which amendment provided for the Company to make a discretionary advance to Wellstat Diagnostics.

On September 24, 2014, the Company filed an ex-parte petition for appointment of receiver with the Circuit Court of Montgomery County, Maryland (“the Wellstat Diagnostics Petition,Petition”), which was granted on the same day. The order granting the Wellstat Diagnostics Petition authorizes the receiver to take immediate possession of the physical assets of Wellstat Diagnostics, with the purpose of holding, protecting, insuring, managing and preserving the business of Wellstat Diagnostics and the value of the Company’s collateral. Wellstat Diagnostics has remained in operation during the period of the receivership with incremental additional funding from the Company.

On November 4, 2014, the Company entered into the third amendment to the amended and restated credit agreement with Wellstat Diagnostics. The amendment provides that additional funding, if any, to be made by the Company is conditioned upon the agreement by Wellstat Diagnostics to make certain operational changes within Wellstat Diagnostics, which the Company believes will allow the receiver to more efficiently optimize the value of the collateral.



During the second quarter of 2015, the receiver initiated a process for a public sale of the assets of Wellstat Diagnostics and retained the investment banking firm of Duff & Phelps to organize and manage the sale process. The receiver filed a "Motion For“Motion for Approval of Sale Procedures"Procedures” with the Circuit Court for Montgomery County, Maryland, which is the court having jurisdiction over the receivership and a hearing was held on July 22, 2015, at which time arguments were heard from interested parties regarding the sale procedures. No significant substantive disagreements between the parties regarding the sale procedures remained after the hearing and a decision approving the receiver’s sale procedures was made in the third quarter of 2015. PDLThe Company submitted a credit bid for the Wellstat Diagnostic assets at a value corresponding to some portion of the outstanding amount due under the amended and restated credit agreement which is subject to court approval. A hearing was scheduled in the Maryland Circuit Court for April 13, 2016 to hear the Receiver’s motion to approve the credit bid sale to PDL.the Company. However, on April 12, 2016, Wellstat Diagnostics changed its name to Defined Diagnostics, LLC and filed for bankruptcy under Chapter 11 in the United StatedStates Bankruptcy Court in the Southern District of New York. The filing of the bankruptcy case stays the proceedings in the Maryland Circuit Court pursuant to the automatic stay provisions of the Bankruptcy Code. On June 15, 2016, in response to a Motion to Dismiss filed by the Company alleging, among other things, that the New York Bankruptcy Court is not a proper venue for Defined Diagnostics to file for bankruptcy under Chapter 11, the New York Bankruptcy Court dismissed and transferred the action to the United States Bankruptcy Court in Delaware. On August 2, 2016 the Delaware Bankruptcy Court announced its decision to grant the Company’s motion to dismiss the chapter 11 petition with prejudice as a bad faith filing, which resulted in a lifting of the stay on the receivership sale in the Maryland Circuit Court. A hearing has been scheduled for December 22, 2016, in front of the Maryland Circuit Court related to the Company’s credit bid for Wellstat Diagnostics’ assets.

On September 4, 2015, PDLthe Company filed in the Supreme Court of New York a motion for summary judgment in lieu of complaint which requested that the court enter judgment against certain of the Wellstat Diagnostics Guarantors for the total amount due on the Wellstat Diagnostics debt, plus all costs and expenses including lawyers’ fees incurred by the Company in enforcement of the related guarantees. On September 23, 2015, PDLthe Company filed in the same court an ex parte application for a temporary restraining order and order of attachment of the Wellstat Diagnostics Guarantors'Guarantor defendants’ assets. At a hearing on September 24, 2015, regarding the Company’s request for a temporary restraining order, the court ordered that the Company’s request for attachment and for summary judgment would be heard at a hearing on November 5, 2015. Although the court denied the Company’s request for a temporary restraining order at the hearing on September 24, 2015, it ordered that assets of the Wellstat Diagnostics GuarantorsGuarantor defendants should be held in status quo ante and only used in the normal course of business pending the outcome of the matters under consideration at the hearing.

On July 29, 2016, the Supreme Court of New York issued its Memorandum of Decision granting the Company’s motion for summary judgment and denying the Wellstat Diagnostics Guarantors’ cross-motion for summary judgment. The court inSupreme Court of New York held that the Wellstat Diagnostics Guarantor defendants are liable for all “Obligations” owed by Wellstat Diagnostics to the Company. It did not set a specific dollar amount due, but ordered that a judicial hearing officer or special referee be designated to determine the amount of the Obligations owing, and awarded the Company its attorneys’ fees and costs in an amount to be determined.

On July 29, 2016, the Wellstat Diagnostics Guarantor defendants filed a notice of appeal from the Memorandum of Decision to the Appellate Division of the Supreme Court of New York. On February 14, 2017, the Appellate Division of the Supreme Court of New York reversed on procedural grounds the portion of the Memorandum of Decision granting the Company summary judgment in lieu of complaint, but affirmed the portion of the Memorandum of Decision denying the Wellstat Diagnostics Guarantor defendants’ motion for summary judgment in which they sought a determination that the guarantees had been released. As a result, the litigation has been remanded to the Supreme Court of New York to proceed on the Company’s claims as a plenary action.

On September 1, 2016, the Company filed a motion for relief pursuant to New York law (i) restraining the Wellstat Diagnostics Guarantor defendants from making any sale, assignment, transfer or interference in any of their property, or from paying over or otherwise disposing of any debt and (ii) authorizing the Company to examine the assets of each of the Wellstat Diagnostics Guarantor defendants. On October 5, 2016, the Wellstat Diagnostics Guarantor defendants filed a motion for leave of the court to assert counterclaims against the Company, and certain officers and consultants of the Company, for (i) breach of fiduciary duty, (ii) intentional interference with prospective economic advantage, (iii) breach of the duty of good faith and fair dealing and negligent misrepresentation. A hearing date on the motion to assert counterclaims has yet to rulebe set.

On October 14, 2016, the Company sent a notice of default and reference to foreclosure proceedings to certain of the Wellstat Diagnostics Guarantors which are not defendants in the New York action, but which are owners of real estate assets over which a deed of trust in favor of the Company securing the guarantee of the loan to Wellstat Diagnostics had been executed. On March 2, 2017, the Company sent a second notice to foreclose on the Company's motionsreal estate assets, and noticed the sale for attachmentMarch 29, 2017. The sale was taken off the calendar by the trustee under the deed of trust and summary judgment.has not been re-scheduled yet. On March


6, 2017, the Company sent a letter to the Wellstat Diagnostics Guarantors seeking information in preparation for a UCC Article 9 sale of some or all of the intellectual property-related collateral of the Wellstat Diagnostics Guarantors. The Wellstat Diagnostics Guarantors did not respond to the Company’s letter, but on March 17, 2017, filed an order to show cause with the New York Supreme Court to enjoin the Company’s sale of the real estate or enforcing its security interests in the Wellstat Diagnostics Guarantors’ intellectual property during the pendency of any action involving the guarantees at issue. The court has not yet decided the Wellstat Diagnostics Guarantor motions.

On October 22, 2015, certain of the Wellstat Diagnostics Guarantors filed a separate complaint against the Company in the Supreme Court of New York seeking a declaratory judgment that certain contractual arrangements entered into between the parties subsequent to Wellstat Diagnostics’ default, and which relate to a split of proceeds in the event that the Wellstat Diagnostics Guarantors voluntarily monetize any assets that are the Company’s collateral, is of no force or effect.


This case is currently pending, but further action has been stayed pending a decision by the Supreme Court on whether to coordinate or consolidate the separate actions for pretrial purposes.

Through the period ended March 31, 2016, PDL2017, the Company has advanced to Wellstat Diagnostics $15.2$19.1 million to fund the ongoing operations of the business and other associated costs. This funding has been expensed as incurred. As of March 31, 2016, PDL is owed $108.4 million, which includes unpaid principal, and interest and repayment of amounts funded for ongoing operations of Wellstat Diagnostics.

Effective April 1, 2014, and as a result of the event of default, wethe Company determined the loan to be impaired and weit ceased to accrue interest revenue. At that time and as of March 31, 20162017, it has been determined that an allowance on the carrying value of the note was not necessary, as the Company believes the value of the collateral securing Wellstat Diagnostics’ obligations exceeds the carrying value of the asset and is sufficient to enable the Company to recover the current carrying value of $50.2 million. The Company continues to closely monitor the timing and expected recovery of amounts due, including litigation and other matters related to Wellstat Diagnostics Guarantors’ assets. There can be no assurance that this will be true inan allowance on the eventcarrying value of the Company’s foreclosurenotes receivable investment will not be necessary in a future period depending on the collateral, nor can there be any assurance of the timing in realizing value from such collateral, whether from the sale process currently underway or a subsequent monetization event if PDL's credit bid for the assets is successful.future developments.

Hyperion Agreement

On January 27, 2012, PDLthe Company and Hyperion Catalysis International, Inc. (“Hyperion”) (which is also a Wellstat Diagnostics Guarantor) entered into an agreement whereby Hyperion sold to PDLthe Company 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 PDLthe Company in exchange for the lump sum payment to Hyperion of $2.3 million. In exchange for the lump sum payment, PDLthe Company was to receive two equal payments of $1.2 million on each of March 5, 2013 and 2014. The first payment of $1.2 million was paid on March 5, 2013, but Hyperion has not made the second payment that was due on March 5, 2014. The Company completed an impairment analysis as of March 31, 2016.2017. Effective with this date and as a result of the event of default, wethe Company ceased to accrue interest revenue. As of March 31, 2016,2017, the estimated fair value of the collateral was determined to be in excess of that of the carrying value. There can be no assurance that this will be true in the event of the Company'sCompany’s foreclosure on the collateral, nor can there be any assurance of realizing value from such collateral.

AxoGen Note Receivable and AxoGen Royalty Agreement

In October 2012, PDL entered into the AxoGen Royalty Agreement with AxoGen providing for the payment of specified royalties to PDL 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 had an eight-year term and provided PDL with royalties of 9.95% based on AxoGen's net revenues, subject to agreed-upon guaranteed quarterly minimum payments of approximately $1.3 million to $2.5 million, which began in the fourth quarter of 2014, and the right to require AxoGen to repurchase the royalties under the AxoGen Royalty Agreement at the end of the fourth year. AxoGen was 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. The royalty rights were secured by the cash and accounts receivable of AxoGen.

On August 14, 2013, PDL purchased 1,166,666 shares of registered common stock of AxoGen (AXGN) at $3.00 per share, totaling $3.5 million. On December 22, 2014, PDL sold these shares at $3.03 per share, totaling approximately $3.5 million.

On November 13, 2014, the Company agreed to terminate the AxoGen Royalty Agreement in consideration for a payment of $30.3 million in cash, which was the sum of the outstanding principal, interest and embedded derivative. At the same time, the Company acquired 643,382 shares of registered common stock of AxoGen for approximately $1.7 million at a public offering price of $2.72 per share. The shares are classified as available for sale securities and recorded as short-term investments on the Condensed Consolidated Balance Sheets. In the third and fourth quarters of 2015, PDL sold 200,000 and 149,650 shares, respectively, at a price range between $5.46 and $5.69 per share, totaling approximately $1.9 million.

In March 2016, PDL sold on the open market 50,000 shares of AxoGen’s common stock at $5.44 per share, resulting in a gain totaling approximately $136,000.

As of March 31, 2016, PDL held 243,732 shares of AxoGen common stock, which were valued at $1.3 million, which resulted in an unrealized gain of $0.6 million and is recorded in "Other comprehensive income (loss), net of tax."



Avinger Credit and Royalty Agreement

On April 18, 2013, PDL entered into the Avinger Credit and Royalty Agreement, 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 available to Avinger, we funded an initial $20.0 million, net of fees, at the close of the transaction. Outstanding borrowings under the initial loan bore interest at a stated rate of 12% per annum.

On September 22, 2015, Avinger elected as per the voluntary prepayment provision under the Avinger Credit and Royalty Agreement to prepay the note receivable in whole for a payment of $21.4 million in cash, which was the sum of the outstanding principal, interest and a prepayment fee.

Under the terms of the Avinger Credit and Royalty Agreement, the Company receives a low, single-digit royalty on Avinger'sAvinger’s net revenues until April 2018. Commencing in October 2015, after Avinger repaid the$21.4 million pursuant to its note receivable prior to its maturity date, the royalty on Avinger'sAvinger’s net revenues reducedreduce by 50%, subject to certain minimum payments from the prepayment date until April 2018. PDLThe Company has accounted for the royalty rights in accordance with the fair value option. For a further discussion of the Avinger Credit and Royalty Agreement, see Note 3.

LENSAR Credit Agreement

On October 1, 2013, PDLthe Company entered into a credit agreement with LENSAR, underInc. (“LENSAR”), pursuant to which PDLthe Company made available to LENSAR up to $60.0$60.0 million to be used by LENSAR in connection with the commercialization of its currently marketed LENSAR™ Laser System. Of the $60.0$60.0 million available to LENSAR, an initial $40.0$40.0 million,, net of fees, was funded by the Company at the close of the transaction. The remaining $20.0$20.0 million, in the form of a second tranche is no longer available to LENSAR under the terms of the credit agreement. Outstanding borrowings under the loans bore interest at the rate of 15.5% per annum, payable quarterly in arrears.

On May 12, 2015, PDLthe Company entered into a forbearance agreement with LENSAR, underpursuant to which PDLthe Company agreed to refrain from exercising certain remedies available to it resulting from the failure of LENSAR to comply with a liquidity covenant and make interest payments due under the credit agreement. Under the forbearance agreement, PDLthe Company agreed


to provide LENSAR with up to an aggregate of $8.5 million in weekly increments through the period ended September 30, 2015 plus employee retention amounts of approximately $0.5 million in the form of additional loans, subject to LENSAR meeting certain milestones related to LENSAR obtaining additional capital to fund the business or selling itselfsell the business and repayingrepay outstanding amounts under the credit agreement. In exchange for the forbearance, LENSAR agreed to additional reporting covenants, the engagement of a chief restructuring officer and an increase on the interest rate to 18.5%, applicable to all outstanding amounts under the credit agreement.

On September 30, 2015, PDLthe Company agreed to extend the forbearance agreement until October 9, 2015 and provide for up to an additional $0.8 million in funding while LENSAR negotiated a potential sale of its assets. On October 9, 2015, the forbearance agreement expired, but PDLthe Company agreed to fund LENSAR'sLENSAR’s operations while LENSAR continued to negotiate a potential sale of its assets.

On November 15, 2015, New LENSAR, LLC (“LENSAR/Alphaeon”), a wholly owned subsidiary of Alphaeon Corporation (“Alphaeon”), and LENSAR entered into the Asset Purchase Agreement whereby New LENSARLENSAR/Alphaeon agreed to acquire substantially all thecertain assets of LENSAR and assumed certain liabilities of LENSAR subject to the satisfaction of certain closing conditions.LENSAR. The acquisition was consummated on December 15, 2015.

In connection with the closing of the acquisition, New LENSARLENSAR/Alphaeon entered into an amended and restated credit agreement with PDL,the Company, assuming $42.0 million in loans as part of the borrowings under PDL’sthe Company’s prior credit agreement with LENSAR. In addition, Alphaeon issued 1.7 million shares of its Class A common stock to PDL.the Company.

Under the terms of the amended and restated credit agreement, PDLThe Company has a first lien security interest in substantially all of the equity interests and assets of New LENSAR. The loans bear interest of 15.5% per annum, payable quarterly in arrears. New LENSAR may elect to pay in kind interest the first three interest payments in the form of additional principal amount added to the loans. The principal repayment will commence on the ninth interest payment date. The principal amount outstanding at commencement of repayment is to be repaid in equal installments until final maturity of the loans which is December 15, 2020.

PDL concluded that the amendment and restatement of the original LENSAR credit agreement shall be accounted for as a troubled debt restructuring due to the concession granted by PDL and LENSAR’s financial difficulties. PDL has recognized a loss on extinguishment of notes receivable of $4.0 million and expensed $3.0 million of closing fees as general & administrative costs as incurred at closing on December 15, 2015.



We have estimated a fair value of $3.84 per share for the 1.7 million shares of Alphaeon Class A common stock received in connection with the transactions and recognized this investment as a cost-method investment of $6.6 million included in other long-term asset. The Alphaeon Class A common stock is subject to other-than-temporary impairment assessments in future periods. There is no other-than-temporary impairment charge incurred as of March 31, 2016.2017.

In December 2016, LENSAR, re-acquired the assets from LENSAR/Alphaeon and the Company entered into an amended and restated credit agreement with LENSAR whereby LENSAR assumed all obligations outstanding under the credit agreement with LENSAR/Alphaeon. Also in December, LENSAR filed for a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code (“Chapter 11 case”) with the support of the Company. In January 2017, the Company agreed to provide debtor-in-possession financing of up to $2.8 million in new advances to LENSAR so that it can continue to operate its business during the remainder of the Chapter 11 case. LENSAR has filed a Chapter 11 plan of reorganization with the Company’s support under which LENSAR will issue 100% of its equity securities to the Company in exchange for the cancellation of the Company’s claims as a secured creditor in the Chapter 11 case, other than with respect to the debtor-in-possession financing, and will become an operating subsidiary of the Company.

On April 26, 2017 the bankruptcy court approved the plan of reorganization, and the Company expects that LENSAR will emerge from the Chapter 11 case on or about May 11, 2017.

The Company completed an impairment analysis as of March 31, 2017. Effective with this date and as a result of the event of default, the Company determined the loan to be impaired and the Company ceased to accrue interest revenue. As of March 31, 2017, the estimated fair value of the collateral would be sufficient to recover the carrying value. There can be no assurance that this will be true, nor can there be any assurance of realizing value from such collateral.

Direct Flow Medical Credit Agreement

On November 5, 2013, PDLthe Company entered into a credit agreement with Direct Flow Medical, Inc. (“Direct Flow Medical”) under which PDLthe Company agreed to provide up to $50.0$50.0 million to Direct Flow Medical. Of the $50.0$50.0 million available to Direct Flow Medical, an initial $35.0$35.0 million (tranche one), net of fees, was funded by the Company at the close of the transaction. Pursuant to the original terms of the credit agreement the Company agreed to provide Direct Flow Medical with an additional $15.0$15.0 million tranche, net of fees, upon the attainment of a specified revenue milestone to be accomplished no later than December 31, 2014 (the tranche two milestone). Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bore interest at the rate of 15.5% per annum, payable quarterly in arrears.

On November 10, 2014, PDLthe Company and Direct Flow Medical agreed to an amendment to the credit agreement to permit Direct Flow Medical to borrow the $15.0 million second tranche upon receipt by Direct Flow Medical of a specified minimum amount of proceeds from an equity offering prior to December 31, 2014. In exchange, the parties amended the credit agreement to provide for additional fees associated with certain liquidity events, such as a change of control or the consummation of an initial public offering, and granted PDLthe Company certain board of director observation rights. On November 19, 2014, upon Direct Flow Medical satisfying the amended tranche two milestone, the Company funded the $15.0 million second tranche to


Direct Flow Medical, net of fees. Upon occurrence of the borrowing of this second tranche, the interest rate applicable to all loans under the credit agreement was decreased to 13.5% per annum, payable quarterly in arrears.

Under the terms of the credit agreement, Direct Flow Medical’s obligation to repay loan principal repayment will commencecommenced on the 12thtwelfth interest payment date, September 30, 2016. The principal amount outstanding at commencement of repayment willis required to be repaid in equal installments until final maturity of the loans. The loans 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.

On December 21, 2015, Direct Flow Medical and PDLthe Company entered into a waiver to the credit agreement in anticipation of Direct Flow Medical being unable to comply with the liquidity covenant and make interest payments due under the credit agreement.

On January 14, 2016, both parties agreed to provide Direct Flow Medical with an extension to waive the liquidity covenant and delay the timing of the interest payments through the period ending September 30, 2016.2016 while Direct Flow Medical sought additional financing to operate its business.

On January 28, 2016, PDLthe Company funded an additional $5.0 million to Direct Flow Medical in the form of a short-term secured promissory note.

On February 26, 2016, PDLthe Company and Direct Flow Medical entered into the fourth Amendmentamendment to the Credit Agreementcredit agreement that, among other things, (i) converted the $5.0 million short-term secured promissory note into a loan under the credit agreement with substantially the same interest and payment terms as the existing loans, (ii) added a conversion option providingfeature whereby the right to convert the additional $5.0 million loan would convert into equity of Direct Flow Medical atupon the optionoccurrence of PDLcertain events and (iii) provided for an additionala second $5.0 million convertible loan tranche commitment, to be funded at the option of PDL.the Company. The commitment for the second tranche was not funded and has since expired. In addition, (i) PDLthe Company agreed to waive the liquidity covenant and delay the timing of the unpaid interest payments until September 30, 2016 and (ii) Direct Flow Medical agreed to issue to PDLthe Company a specified amount of warrants to purchase shares of convertible preferred stock on the first day of each month for the duration of the waiver period at an exercise price of $0.01 per share. At March

On July 15, 2016, the Company and Direct Flow Medical entered into the fifth amendment and limited waiver to the credit agreement. The Company funded an additional $1.5 million to Direct Flow Medical in the form of a note with substantially the same interest and payment terms as the existing loans and a conversion feature whereby the $1.5 million loan would convert into equity of Direct Flow Medical upon the occurrence of certain events. In addition, Direct Flow Medical agreed to issue to the Company warrants to purchase shares of convertible preferred stock at an exercise price of $0.01 per share.

On September 12, 2016, the Company and Direct Flow Medical entered into the sixth amendment and limited waiver to the credit agreement under which the Company funded an additional $1.5 million to Direct Flow Medical in the form of a note with substantially the same interest and payment terms as the existing loans. In addition, Direct Flow Medical agreed to issue to the Company a specified amount of warrants to purchase shares of convertible preferred stock at an exercise price of $0.01 per share.

On September 30, 2016, the Company and Direct Flow Medical entered into the tenth limited waiver to the credit agreement where the parties agreed, among other things, to (i) delay payment on all overdue interest payments until October 31, 2016, we determined(ii) waive the initial principal repayment until October 31, 2016 and (iii) continue to waive the liquidity requirements until October 31, 2016. Further, Direct Flow Medical agreed to issue to the Company a specified amount of warrants to purchase shares of convertible preferred stock at an estimatedexercise price of $0.01 per share.

On October 31, 2016, the Company agreed to extend the waivers described above until November 30, 2016 and on November 14, 2016, the Company advanced an additional $1.0 million loan while Direct Flow Medical continued to seek additional financing.

On November 16, 2016, Direct Flow Medical advised the Company that its potential financing source had modified its proposal from an equity investment to a loan with a substantially smaller amount and under less favorable terms. Direct Flow Medical shut down its operations in December 2016 and in January 2017 made an assignment for the benefit of creditors. The Company then initiated foreclosure proceedings, resulting in the Company obtaining ownership of most of the Direct Flow Medical assets through its wholly-owned subsidiary, DFM, LLC. The assets are held for sale and carried at the lower of


carrying amount or fair value, of the warrant of $0.4 million.less estimated selling costs, which is primarily based on supporting data from market participant sources, and valid offers from third parties.

TheAt December 31, 2016, the Company completed an impairment analysis and concluded that the situation qualified as a troubled debt restructuring and recognized an impairment loss of $51.1 million.

In January 2017, the Company started to actively market the asset held for sale. On January 23, 2017, the Company and DFM, LLC entered into an Intellectual Property Assignment Agreement with Hong Kong Haisco Pharmaceutical Co., Limited (“Haisco”), a Chinese pharmaceutical company, whereby Haisco acquired former Direct Flow Medical clinical, regulatory and commercial information and intellectual property rights exclusively in China for $7.0 million. The Company also sold Haisco certain manufacturing equipment for $450,000 and collected $438,000 on outstanding Direct Flow Medical accounts receivable during the first quarter of 2017. The Company is exploring alternatives to further monetize the remaining assets of Direct Flow Medical and has ascribed a carrying value of $2.1 million to the remaining assets held for sale at March 31, 2016. Effective as of this date and as a result of the waived defaults, we determined the loan to be impaired and we ceased to accrue interest revenue. As of March 31, 2016, the estimated fair value of the collateral was determined to be in excess of that of the carrying value. In the event the Company was to foreclose on the collateral, there can be no assurance as to the accuracy of the estimated fair value of the collateral, nor can there be any assurance of realizing value from such collateral.


2017.

Paradigm Spine Credit Agreement

On February 14, 2014, the Company entered into the Credit Agreement (the “Paradigm Spine Credit Agreement”) with Paradigm Spine, Credit Agreement,LLC (“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 $50.0 million, net of fees, was funded by the Company at the close of the transaction. The second and third tranches of up to an additional $25.0 million in the aggregate, net of fees, are no longer available under the terms of the Paradigm Spine Credit Agreement.

On October 27, 2015, PDLthe Company and Paradigm Spine entered into an amendment to the Paradigm Spine Credit Agreement to provide additional term loan commitments of up to $7.0 million payable in two tranches, of $4.0 million and $3.0 million, of which the first tranche of $4.0 million was drawn on the closing date of the amendment, net of fees, andfees. Paradigm Spine chose not to draw down the second tranche of $3.0 million and such tranche is to be funded at the option of Paradigm Spine prior to June 30, 2016.

no longer available. Borrowings under the credit agreement bearbore interest at the rate of 13.0% per annum, payable quarterly in arrears.

UnderOn August 26, 2016, the termsCompany received $57.5 million in connection with the prepayment of the Paradigm Spine Credit Agreement, principal repayment will commence on the 12th 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 mature on February 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 Paradigm Spine Credit Agreement, are secured bywhich included a pledge of substantially allrepayment of the assetsfull principal amount outstanding of Paradigm Spine$54.7 million, plus accrued interest and its domestic subsidiaries and, initially, certain assets of Paradigm Spine’s German subsidiaries.a prepayment fee.

kaléo Note Purchase Agreement

On April 1, 2014, PDLthe Company entered into a note purchase agreement with Accel 300, LLC (“Accel 300”), a wholly-owned subsidiary of kaléo, Inc. (“kaléo”), pursuant to which the Company acquired $150.0 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 the20% of net sales of its first approved product, Auvi-Q® (epinephrine auto-injection, USP) (known as Allerject® in Canada) and 10% of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection ) (the “kaléo Revenue InterestsInterests”), and a pledge of kaléo’s equity ownership in Accel 300.

The secured notes bear interest at 13% per annum, paid quarterly in arrears on principal outstanding. The principal balance of the secured notes is repaid to the extent that the kaléo Revenue Interests exceed the quarterly interest payment, as limited by a quarterly payment cap. The final maturity of the secured notes is June 2029. kaléo may redeem the secured notes at any time, subject to a redemption premium.

On October 28, 2015, Sanofi US initiated a voluntary nationwide recall of all Auvi-Qunits effectively immediately because in rare cases the syringe would not deliver the proper amount of epinephrine, the drug used to treat severe allergic reactions. Sanofi was the exclusive licensee of kaléo for the manufacturing and commercialization of Auvi-Q.

In March 2016, Sanofi and kaléo terminated their license and development agreement and all U.S. and Canadian commercial and manufacturing rights to Auvi-Q® and Allerject®, and manufacturing equipment, were returned to kaléo. As part of the financing transaction, kaléo was required to establish an interest reserve account of $20.0 million from the $150.0 million provided by the Company. The purpose of this interest reserve account is to cover any possible shortfalls in interest payments owed to the Company. While the interest reserve account was depleted in the second quarter of 2016, kaléo continues to make interest payments due to the Company under the note purchase agreement and the Company expects that kaléo will fund future


interest payments with existing cash to the extent that the kaléo Revenue Interests are insufficient during the reintroduction of Auvi-Q to the market. kaléo reintroduced Auvi-Q to the U.S. market on February 14, 2017.

As of March 31, 2016,2017, the Company determined that its royalty purchase interest in Accel 300 represented a variable interest in a variable interest entity. However, the Company does not have the power to direct the activities of Accel 300 that most significantly impact Accel 300's300’s economic performance and is not the primary beneficiary of Accel 300; therefore, Accel 300 is not subject to consolidation by the Company.

On October 28, 2015, Sanofi US initiated a voluntary nationwide recall of all Auvi-Q®units effectively immediately. Sanofi is the exclusive licensee of kaléo for the manufacturing and commercialization of Auvi-Q. While Sanofi has not identified the reason for the recall, press reports indicate that a small number of units have failed to activate or delivered inadequate doses of epinephrine. Subsequent to the recall, kaléo made a full and timely payment of $9.5 million, which included all principal and interest due in the fourth quarter of 2015.

On February 18, 2016, PDL was advised that Sanofi and kaléo will terminate their license and development agreement later this year. On March 31, 2016, PDL was informed by kaléo that the license and development agreement was terminated and that all U.S. and Canadian commercial and manufacturing rights to Auvi-Q® and Allerject® had been returned to kaléo. All manufacturing equipment had also been returned to kaléo, and they intend to evaluate the timing and options for bringing Auvi-Q and Allerject back to the market. As part of our financing transaction, kaléo was required to establish an interest reserve account of $20.0 million from the $150.0 million provided by PDL. The purpose of this interest reserve account is to cover any possible shortfalls in interest payments owed to PDL. As of this date, despite the recall of Auvi-Q, it is projected that the interest reserve account alone is sufficient to cover possible interest shortfalls substantially through the second quarter of 2016. kaléo has indicated that it intends to make payments due to PDL under the note agreement until Auvi-Q is returned to the market.



PDL will monitor the timing and options for bringing Auvi-Q back to the market and how it may impact the ability of kaléo to meet its obligations under the note purchase agreement, but as of March 31, 2016, it has been determined that there is no impairment.

CareView Credit Agreement

On June 26, 2015, PDLthe Company entered into a credit agreement with CareView Communications Inc. (“Careview”), under which the Company made available to CareView up to $40.0 million in two tranches of $20.0 million each. Under the terms of the credit agreement, the first tranche of $20.0 million, net of fees, was to be funded by the Company upon CareView’s attainment of a specified milestone relating to the placement of CareView Systems®, to be accomplished no later thanon October 31,7, 2015. The Company expects to fund CareView an additionalsecond $20.0 million tranche would be funded upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and Consolidated EBITDA (as defined in the credit agreement),consolidated earnings before interest, taxes, depreciation and amortization, to be accomplished no later than June 30, 2017. Outstanding borrowings under the credit agreement will bear interest at the rate of 13.5% per annum and are payable quarterly in arrears.

As part of the transaction, the Company received a warrant to purchase approximately 4.4 million shares of common stock of CareView at thean exercise price of $0.45 per share. We haveThe Company has accounted for the warrant as derivative asset with an offsetting credit as debt discount. At each reporting period the warrant is marked to market for changes in fair value.

On October 7, 2015, PDLthe Company and CareView entered into an amendment of the credit agreement to modify certain definitions related to the first and second tranche milestones. On this date, PDL also funded the first tranche of $20.0 million, net of fees, upon attainment of the modified first tranche milestone relating to the placement of CareView Systems. The additional $20.0 million in the form of a second tranche continues to be available upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and Consolidated EBITDA, to be accomplished no later than June 30, 2017 under the terms of the amended credit agreement.

In connection with the amendment of the credit agreement, PDLthe Company and CareView also agreed to amend the warrant to purchase common stock agreement by reducing the warrant'swarrant’s exercise price from $0.45 to $0.40 per share. At March 31, 2016, we2017, the Company determined an estimated fair value of the warrant of $0.7$0.2 million.

For carrying value and fair value information related to ourthe Company’s Notes and Other Long-term Receivables, see Note 3.

7.8. Inventory

Inventories consisted of the following (in thousands):
  March 31, December 31,
  2017 2016
Work in process $2,406
 $1,625
Finished goods 1,127
 1,259
Total inventory $3,533
 $2,884

In addition, as of March 31, 2017 and December 31, 2016, the Company deferred approximately $0.5 million and $0.1 million, respectively, of costs associated with inventory transfer made under the Company’s third party logistic provider service arrangement. These costs have been recorded as other assets on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2017 and December 31, 2016. The Company will recognize the cost of product sold as inventory is transferred from its third party logistic provider to the Company’s customers.

During the first quarter of 2017 and fourth quarter of 2016, the Company recognized an inventory write-down of $0.1 million and $0.3 million related to Noden Products that the Company would not be able to sell prior to their expiration.



9. Intangible Assets and Goodwill

Intangible Assets, Net

The components of intangible assets as of March 31, 2017 and December 31, 2016 were as follows (in thousands, except for useful life):
  March 31, 2017 December 31, 2016
(in thousands) Cost Accumulated Amortization Net Cost Accumulated Amortization Net
Finite-lived intangible assets:            
Acquired products rights(1)
 $216,690
 $(16,252) $200,438
 $216,690
 $(10,834) $205,856
Customer relationships(1)
 23,880
 (1,791) 22,089
 23,880
 (1,194) 22,686
  $240,570
 $(18,043) $222,527
 $240,570
 $(12,028) $228,542
________________
(1) We acquired certain intangible assets as part of the Noden Transaction, as described further in Note 16. They are amortized on a straight line basis over a weighted average of 10.0 years.

Amortization expense for the three months ended March 31, 2017 was $6.0 million.

Based on the intangible assets recorded at March 31, 2017, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated amortization expense is expected to be as follows (in thousands):
Fiscal Year Amount
2017 (Remaining nine months) $18,043
2018 24,057
2019 24,057
2020 24,057
2021 24,057
2022 24,057
Thereafter 84,199
Total purchased intangible assets $222,527

Goodwill

Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed. The Company applies ASC 350, Goodwill and Other Intangible Assets, which requires testing goodwill for impairment on an annual basis. The Company assesses goodwill for impairment as part of its annual reporting process in the fourth quarter. The Company evaluates goodwill on a reporting unit basis as the Company is organized as a multiple reporting unit.

The Company’s projected cash flows for the Noden Products decreased significantly during the fourth quarter of 2016 as the Company obtained new information relating to the Noden Products in December 2016. The Company concluded that, given this significant and sustained decrease in projected cash flows, a triggering event requiring an assessment of goodwill impairment had occurred during the fourth quarter of 2016. The Company performed the goodwill impairment assessment using an income approach, which is forward-looking, and relies primarily on internal forecasts. Within the income approach, the Company used the discounted cash flow method. The Company starts with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then applies a reporting unit-specific discount rate to arrive at a net present value. Some of the more significant estimates and assumptions inherent in this approach include (i) the amount and timing of the projected net cash flows, (ii) the selection of a long-term growth rate, (iii) the discount rate, which seeks to reflect the various risks inherent in the projected cash flows and (iv) the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.

The initial assessment indicated that it was likely the Company’s goodwill was impaired, and the Company proceeded to perform a full goodwill impairment assessment. As a result of that assessment, the Company concluded that a goodwill


impairment loss of $3.7 million was necessary. Following the recording of the goodwill impairment loss, the Company’s goodwill as of March 31, 2017 and December 31, 2016 was zero.

10. Accrued Liabilities

Accrued liabilities consist of the following:
 March 31,
2016		 December 31,
2015
(In thousands)    
(in thousands) March 31,
2017		 December 31,
2016
Compensation $2,933
 $1,979
 $4,199
 $3,131
Interest 1,643
 4,107
 2,321
 2,554
Deferred revenue 541
 87
Dividend payable 143
 184
 122
 21
Legal 1,218
 730
 1,083
 1,594
Accrued rebates, chargebacks and other revenue reserves 17,066
 12,338
Refund to manufacturer 8,909
 8,909
Other 775
 922
 3,100
 2,028
Total $7,253
 $8,009
 $36,800
 $30,575

The following table provides a summary of activity with respect to the Company’s sales allowances and accruals for the three months ended March 31, 2017:
(in thousands) Discount and Distribution Fees Government Rebates and Chargebacks Assistance and Other Discounts Product Return Total
Balance at December 31, 2016: $2,475
 $5,514
 $2,580
 $1,769
 $12,338
Allowances for current period sales 2,243
 4,939
 2,264
 1,235
 10,681
Allowances for prior period sales —
 253
 —
 —
 253
Credits/payments for current period sales (453) —
 —
 —
 (453)
Credits/payments for prior period sales (1,451) (3,746) (556) —
 (5,753)
Balance at March 31, 2017 $2,814
 $6,960
 $4,288
 $3,004
 $17,066

8.11. Commitments and Contingencies

PDL BioPharma, Inc. v Merck Sharp & Dohme, Corp.

On October 28, 2015, the Company filed a Complaint against Merck Sharp & Dohme, Corp (“Merck”) for patent infringement in the United States District Court for the District of Nevada. In the Complaint, the Company allegesalleged that manufacture and sales of certain of Merck’s Keytruda product infringesinfringed one or more claims of the Company’s '761 Patent.U.S. Patent No. 5,693,761 (the “761 Patent”). The Company has requested judgment that Merck has infringed the '761761 Patent, an award of damages due to the infringement, a finding that such infringement was willful and deliberate and trebling of damages therefore, and a declaration that the case is exceptional and warrants an award of attorney’s fees and costs. Although the '761761 Patent expired on December 2, 2014, the Company believesbelieved that Merck infringed the patent through, e.g., manufacture and/or sale of Keytruda prior to the expiration of the '761761 Patent. On December 21, 2015, Merck filed a Motion to Dismiss for Lack of Personal Jurisdiction. In response to Merck’s motion, on


January 22, 2016, rather than dispute Merck’s contentions regarding jurisdiction, the Company elected to dismiss the action in Nevada and refile the Complaint in its entirety in the District of New Jersey. On May 25, 2016, Merck filed a Motion to Bifurcate Discovery and Trial into Liability and Damages Phases, which motion was granted by the court.

On April 21, 2017, the Company entered into a settlement agreement with Merck to resolve the patent infringement lawsuit between the parties pending in the U.S. District Court for the District of New Jersey related to Merck’s Keytruda humanized antibody product. Under the terms of the agreement, Merck will pay the Company a one time, lump-sum payment of $19.5 million, and the Company will grant Merck a fully paid-up, royalty free, non-exclusive license to certain of the Company’s rights to issued patents in the United States and elsewhere, covering the humanization of antibodies (the “Queen et al. patent”) for use in connection with Keytruda as well as a covenant not to sue Merck for any royalties regarding Keytruda. In addition, the parties agreed to dismiss all claims in the relevant legal proceedings.



Wellstat Litigation

On September 4, 2015, PDLthe Company filed in the Supreme Court of New York a motion for summary judgment in lieu of complaint
which requested that the court enter judgment against Wellstat Diagnostics Guarantors for the total amount due on the Wellstat Diagnostics debt, plus all costs and expenses including lawyers’ fees incurred by the Company in enforcement of the related guarantees. On September 23, 2015, PDL filed inJuly 29, 2016, the same court an ex parte applicationissued its Memorandum of Decision granting the Company’s motion for a temporary restraining ordersummary judgment and order of attachment ofdenying the Wellstat Diagnostics Guarantors' assets. At a hearing on September 24, 2015, regarding the Company’s request for a temporary restraining order, the court ordered that the Company’s request for attachment andGuarantors’ cross-motion for summary judgment would be heard atseeking a hearing on November 5, 2015. Althoughdetermination that they were no longer liable under the court denied the Company’s request for a temporary restraining order at the hearing on September 24, it orderedguarantees. The Supreme Court of New York held that assets of the Wellstat Diagnostics Guarantors shouldare liable for all “Obligations” owed by Wellstat Diagnostics to the Company. It did not set a specific dollar amount due, but ordered that a judicial hearing officer or special referee be held in status quo ante and only used indesignated to determine the normal course of business pending the outcomeamount of the hearing. The courtObligations owing, and awarded the Company its attorneys’ fees and costs in New York has yetan amount to rule on the Company’s motions for attachment and summary judgment.

be determined. On October 22, 2015,July 29, 2016, the Wellstat Diagnostics Guarantors filed a complaint againstnotice of appeal from the Company inMemorandum of Decision to the Appellate Division of the Supreme Court of New York. On February 14, 2017, the Appellate Division reversed the summary judgment decision of the Supreme Court in the Company’s favor, but affirmed the denial of the Wellstat Guarantors’ cross-motion for summary judgment. The Appellate Division determined that the action was inappropriate for summary judgment pursuant to New York seeking a declaratory judgment that certain contractual arrangements entered into betweenCivil Practice Law & Rules section 3213 on procedural grounds, but specifically made no determination regarding whether the parties subsequent to Wellstat Diagnostics’ default, and which relateCompany was entitled to a split of proceedsjudgment on the merits. Pursuant to this decision, the action will be remanded to the Supreme Court for further proceedings on the merits. The proceeding will be conducted as a plenary proceeding, with both parties having the opportunity to take discovery and file dispositive motions in the event that the Wellstat Diagnostics Guarantors voluntarily monetize any assets that are the Company’s collateral, is of no force or effect.accordance with New York civil procedure.

Other Legal Proceedings

From time to time, we arethe Company is involved in lawsuits, arbitrations, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. We makeThe Company makes provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. If any unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of ourthe Company’s operations of that period and on ourits cash flows and liquidity.

Lease Guarantee

In connection with the Spin-Off, wespin-off (the “Spin-Off”) by the Company of Facet Biotech Corporation (“Facet”), the Company entered into amendments to the leases for ourthe Company’s 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 March 31, 2016,2017, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately $64.9 million.$53.6 million. In April 2010, Abbott Laboratories acquired Facet and later renamed the entity AbbVie.AbbVie Biotherapeutics, Inc. (“AbbVie”). If AbbVie were to default under its lease obligations, the Company could be held liable by the landlord as a co-tenant and, thus, the Company has in substance guaranteed the payments under the lease agreements for the Redwood City facilities.

The Company prepared a discounted, probability weighted cash flow analysis to calculate the estimated fair value of the lease guarantee as of the Spin-Off. The Company was required to make assumptions regarding the probability of Facet’s default on the lease payment, the likelihood of a sublease being executed and the times at which these events could occur. These assumptions are based on information that we couldreceived from real estate brokers and the then-current economic conditions, as well as expectations of future economic conditions. The fair value of this lease guarantee was charged to additional paid-in capital upon the Spin-Off and any future adjustments to the carrying value of the obligation will 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.recorded in additional paid-in capital.

We haveThe Company has recorded a liability of $10.7 million on ourits Condensed Consolidated Balance Sheets as of March 31, 2016,2017 and December 31, 2015,2016, related to this guarantee. In future periods, wethe Company may adjust this liability for any changes in the ultimate outcome of this matter that are both probable and estimable.

Irrevocable Letters of Credit

On June 30, 2016, the Company purchased a $75.0 million certificate of deposit, which is designated as cash collateral for the $75.0 million letter of credit issued on July 1, 2016 with respect to the first anniversary payment under the Noden Purchase Agreement (as defined in Note 16 below). In addition, we provided an irrevocable and unconditional guarantee to Novartis


9.Pharma AG (“Novartis”), to pay up to $14.0 million of the remaining amount of the first anniversary payment not covered by the letter of credit. The Company concluded that both guarantees are contingent obligations and shall be accounted for in accordance with ASC 450, Contingencies. Further, it was concluded that both guarantees do not meet the conditions to be accrued at March 31, 2017.

Purchase Obligation

In connection with the Noden Transaction, Noden entered into an unconditional purchase obligation with Novartis to acquire all local finished goods inventory in certain countries upon transfer of the applicable marketing authorization rights in such country. The purchase is payable within 60 days after the transfer of the marketing authorization rights. The agreement does not specify minimum quantities but details pricing terms.

In addition, Noden and Novartis entered into a supply agreement pursuant to which Novartis will manufacture and supply to Noden a finished form of the Noden Products and bulk drug form of the Noden Products for specified periods of time prior to the transfer of manufacturing responsibilities for the Noden Products to another manufacturer. The supply agreement commits the Company to a minimum purchase obligation of approximately $9.6 million and $120.7 million over the next twelve and twenty-four months, respectively. The Company expects to meet this requirement. For more information about the Noden Transaction, see Note 16 below.

12. Convertible Notes and Term Loans
  
    Principal Balance Outstanding Carrying Value 
    March 31, March 31, December 31, 
Description Maturity Date 2016 2016 2015 
(In thousands)         
Convertible Notes         
February 2018 Notes February 1, 2018 $246,447
 $230,850
*$228,862
*
March 2015 Term Loan February 15, 2016 $—
 —
 24,966
 
Total    
 $230,850
 $253,828
 
* Effective January 1, 2016, the Company adopted ASU 2015-03 and changed its method of presentation relating to debt issuance cost. Prior to 2016, the Company's policy was to present these costs in other assets on the consolidated balance sheet, net of accumulated amortization. Beginning in 2016, the Company has presented these fees as a direct deduction to the related debt. As a result, we reclassified $3.5 million and $4.0 million of deferred financing costs as of March 31, 2016 and December 31, 2015, respectively, from other assets, which are currently presented as a direct deduction to the February 2018 Notes.

Series 2012 Notes

In January 2012, we issued and exchanged $169.0 million aggregate principal of Series 2012 Notes for an identical principal amount of the February 2015 Notes, plus a cash payment of $5.00 for each $1,000 principal amount tendered, totaling approximately $845,000. The cash 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 were 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 issued and exchanged an additional $10.0 million aggregate principal amount of the Series 2012 Notes for an identical principal amount of the 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 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 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 is 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 Series 2012 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 de-recognition 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 that was amortized over the remaining life of the Series 2012 Notes.

On October 20, 2014, the Company entered into a privately negotiated exchange agreement under which it retired approximately $26.0 million in principal of the 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. The Company issued approximately 1.8 million shares of its common stock and paid a cash payment of approximately $26.2 million. Immediately following the exchange, $22.3 million principal amount of the Series 2012 Notes was outstanding with approximately $0.1 million of remaining original issuance discount to be amortized over the remaining life of the Series 2012 Notes.



The Series 2012 Notes were due February 17, 2015, and bore interest at a rate of 2.875% per annum, payable semi-annually in arrears on February 15 and August 15 of each year. On February 17, 2015, the Company completed the retirement of the remaining $22.3 million of aggregate principal of its Series 2012 notes at their stated maturity for $22.3 million, plus approximately 1.34 million shares of its common stock.

Interest expense for our Series 2012 Notes on our Condensed Consolidated Statements of Income was as follows:

  Three Months Ended
  March 31,
(In thousands) 2016 2015
Contractual coupon interest $—
 $80
Amortization of debt issuance costs —
 13
Amortization of debt discount —
 76
Total $—
 $169

May 2015 Notes
On May 16, 2011, we issued $155.3 million in aggregate principal amount, at par, of the May 2015 Notes in an underwritten public offering, for net proceeds of $149.7 million. The May 2015 Notes were due May 1, 2015, and we paid interest at 3.75% on the May 2015 Notes semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2011. Proceeds from the 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.

On May 1, 2015, the Company completed the retirement of the remaining $155.1 million of aggregate principal of its May 2015 Notes at their stated maturity for $155.1 million, plus approximately 5.2 million shares of its common stock for the excess conversion value.

Interest expense for the May 2015 Notes on the Condensed Consolidated Statements of Income was as follows:

  Three Months Ended
  March 31,
(In thousands) 2016 2015
Contractual coupon interest $—
 $1,454
Amortization of debt issuance costs —
 326
Amortization of debt discount —
 1,357
Total $—
 $3,137

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. We exercised the purchased call options upon conversion of our May 2015 Notes on May 1, 2015, which required the hedge counterparties to deliver shares to the Company. The hedge counterparties delivered to us approximately 5.2 million of PDL common shares, which was the amount equal to the shares required to be delivered by us to the note holders for the excess conversion value.

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. Under the terms of the warrant agreement, the warrant counterparties had the option to exercise the warrants on their specified expiration dates through the 120 scheduled trading days beginning on July 30, 2015 and ended on January 20, 2016. Because the VWAP of our common stock never exceeded the strike price of the warrants PDL did not deliver any common stock to the warrant counterparties.



The purchased call option transactions and warrant sales effectively served to reduce the potential dilution associated with conversion of our May 2015 Notes.

Because the share price was above $5.72, but below $6.73, upon conversion of the Company's May 2015 Notes, the purchased call options offset the share dilution, and the Company received shares on exercise of the purchased call options equal to the shares that the Company delivered to the note holders.

While the purchased call options reduced the potential equity dilution upon conversion of our May 2015 Notes, prior to the conversion or exercise, our May 2015 Notes and the warrants had 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.
    Principal Balance Outstanding Carrying Value 
    March 31, March 31, December 31, 
Description Maturity Date 2017 2017 2016 
(In thousands)         
Convertible Notes         
February 2018 Notes February 1, 2018 $126,447
 $122,692
 $121,595
 
December 2021 Notes December 1, 2021 $150,000
 112,426
 110,848
 
Total    
 $235,118
 $232,443
 

February 2018 Notes

On February 12, 2014, wethe Company issued $300.0 million in aggregate principal amount, at par, of the February 2018 Notes in an underwritten public offering, for net proceeds of $290.2 million. The February 2018 Notes are due February 1, 2018, and we paythe Company pays interest at 4.0% on the 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 the 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 the Series 2012 Notes.Company’s 2.975% Convertible Senior Notes due February 17, 2016. Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require PDLthe Company to repurchase their February 2018 Notes at a purchase price equal to 100% of the principal, plus accrued interest.

On November 20, 2015, PDL'sthe Company’s agent initiated the repurchase of $53.6 million in aggregate principal amount of its February 2018 Notes for $43.7 million in cash in four open market transactions. The closing of these transactions occurred on November 30, 2015.

It was determined that the repurchase of the principal amount shall be accounted for as an extinguishment.a partial extinguishment of the February 2018 Notes. As a result, a gain on extinguishment of $6.5 million was recorded at closing of the transaction. The $6.5 million gain on extinguishment included the de-recognition of the original issuance discount of $3.1 million, outstanding deferred issuance costs of $0.9 million and agent fees of $0.1 million. Immediately following the repurchase, $246.4 million principal amount of the February 2018 Notes was outstanding with $14.1 million of remaining original issuance discount and $4.1 million of debt issuance costs to be amortized over the remaining life of the February 2018 Notes. As

In connection with this repurchase of March 31, 2016, ourthe February 2018 Notes, are not convertible.the Company unwound a portion of the purchased call options related to the notes. As a result of this unwinding, the Company received $270,000 in cash. The payments received have been recorded as an increase to additional paid-in-capital. In addition, the Company unwound a portion of the warrants for $170,000 in cash, payable by the Company. The payments have been recorded as a decrease to additional paid-in-capital. At March 31,the time of


the transaction, the Company concluded that the remaining purchased call options and warrants continue to meet all criteria for equity classification.

On November 22, 2016, the if-converted valueCompany repurchased $120.0 million in aggregate principal amount of ourits February 2018 Notes did not exceedfor approximately $121.5 million in cash (including $1.5 million of accrued interest) in open market transactions. It was determined that the repurchase of the principal amount.amount shall be accounted for as an extinguishment. The extinguishment included the de-recognition of the original issuance discount of $4.3 million and outstanding deferred issuance costs of $1.3 million. Immediately following the repurchase, $126.4 million principal amount of the February 2018 Notes was outstanding with $4.6 million of remaining original issuance discount and $1.4 million of debt issuance costs to be amortized over the remaining life of the February 2018 Notes.

In connection with the repurchase of the February 2018 Notes, the Company and the counterparties agreed to unwindunwound a portion of the purchased call options. As aThe unwind transaction of the purchased call option did not result of this unwinding, PDL received $270,000 in cash. Theany cash payments received have been recorded as an increase to APIC.between the parties. In addition, the Company and the counterparties agreed to unwind a portion of the warrants, for $170,000which also did not result in any cash payable by PDL. The payments have been recorded as a decrease to APIC.between the parties. At March 31, 2016, PDLthe time of the transaction, the Company concluded that the remaining purchased call options and warrants continue to meet all criteria for equity classification.

The February 2018 Notes are convertible under any of the following circumstances:

During any fiscal quarter ending after the quarter ended June 30, 2014, if the last reported sale price of ourthe 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 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 ourthe Company’s 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 the Company'sCompany’s 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 the Company'sCompany’s common stock as described in the indenture.

As of March 31, 2017, the Company’s February 2018 Notes are not convertible. At March 31, 2017, the if-converted value of the February 2018 Notes did not exceed the principal amount.

In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, we werethe Company was 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, wethe Company separated the principal balance of the 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 usthe Company on the date of issuance, wethe Company 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 the February 2018 Notes and increases interest expense during the term of the February 2018 Notes from the 4.0% cash coupon interest rate to an effective interest rate of 6.9%. As of March 31, 20162017, the remaining discount amortization period is 1.80.9 years.



The carrying value and unamortized discount of the February 2018 Notes were as follows:

(In thousands) March 31, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Principal amount of the February 2018 Notes $246,447
 $246,447
 $126,447
 $126,447
Unamortized discount of liability component (15,597) (17,585) (3,755) (4,852)
Net carrying value of the February 2018 Notes $230,850
 $228,862
 $122,692
 $121,595

Interest expense for ourthe February 2018 Notes on ourthe Company’s Condensed Consolidated Statements of Income was as follows:

 Three Months Ended Three Months Ended
 March 31, March 31,
(In thousands) 2016 2015 2017 2016
Contractual coupon interest $2,464
 $3,000
 $1,265
 $2,464
Amortization of debt issuance costs 438
 543
 249
 438
Amortization of debt discount 1,550
 1,747
 848
 1,550
Total $4,452
 $5,290
 $2,362
 $4,452

Purchased Call Options and Warrants

In connection with the issuance of the February 2018 Notes, wethe Company entered into purchased call option transactions with two hedge counterparties. WeThe Company paid an aggregate amount of $31.0 million for the purchased call options with terms substantially similar to the embedded conversion options in the February 2018 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in the February 2018 Notes, approximately 32.713.8 million shares of ourthe Company’s common stock. WeThe Company may exercise the purchased call options upon conversion of the 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 the February 2018 Notes remain outstanding.

In addition, wethe Company 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 the 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'sCompany’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'sCompany’s common stock exceeds the applicable strike price of the warrants on the date of conversion. WeThe Company 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 ourthe Company’s common stock, as defined in the warrants, exceeds the strike price of the warrants, wethe Company 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 the 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 PDLthe Company stock, require net-share settlement, and met all criteria for equity classification at inception and at March 31, 20162017. 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.

December 2021 Notes

On November 22, 2016, the Company issued $150.0 million in aggregate principal amount, at par, of the December 2021 Notes in an underwritten public offering, for net proceeds of $145.7 million. The December 2021 Notes are due December 1, 2021, and the Company pays interest at 2.75% on the December 2021 Notes semiannually in arrears on June 1 and December 1 of each year, beginning June 1, 2017. A portion of the proceeds from the December 2021 Notes was used to extinguish $120.0 million of the February 2018 Notes.



Upon the occurrence of a fundamental change, as defined in the indenture, holders have the option to require the Company to repurchase their December 2021 Notes at a purchase price equal to 100% of the principal, plus accrued interest.

The December 2021 Notes are convertible under any of the following circumstances:
During any fiscal quarter (and only during such fiscal quarter) commencing after the fiscal quarter ending March 31, 2017, if the last reported sale price of Company common stock for at least 20 trading days (whether or not consecutive), in the period of 30 consecutive trading days, ending on, and including, the last trading day of the immediately preceding fiscal quarter, exceeds 130% of the conversion price for the notes on each applicable trading day;
During the five business-day period immediately after any five consecutive trading-day period, which the Company refers 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 Company common stock and the conversion rate for the notes for each such trading day; or
Upon the occurrence of specified corporate events as described in the indenture.

The initial conversion rate for the December 2021 Notes is 262.2951 shares of the Company’s common stock per $1,000 principal amount of December 2021 Notes, which is equivalent to an initial conversion price of approximately $3.81 per share of common stock, subject to adjustments upon the occurrence of certain specified events as set forth in the indenture.

In accordance with the accounting guidance for convertible debt instruments that may be settled in cash or other assets on conversion, the Company was 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, the Company separated the principal balance of the December 2021 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 9.5%, which represents the estimated market interest rate for a similar nonconvertible instrument available to us on the date of issuance, the Company recorded a total debt discount of $4.3 million, allocated $23.8 million to additional paid-in capital and allocated $12.8 million to deferred tax liability. The discount is being amortized to interest expense over the term of the December 2021 Notes and increases interest expense during the term of the December 2021 Notes from the 2.75% cash coupon interest rate to an effective interest rate of 3.4%. As of March 31, 2017, the remaining discount amortization period is 4.7 years.

The carrying value and unamortized discount of the December 2021 Notes were as follows:
(In thousands) March 31, 2017 December 31, 2016
Principal amount of the December 2021 Notes $150,000
 $150,000
Unamortized discount of liability component (37,574) (39,152)
Net carrying value of the December 2021 Notes $112,426
 $110,848

Interest expense for the December 2021 Notes on the Company’s Condensed Consolidated Statements of Income was as follows:
  Three Months Ended
  March 31,
(In thousands) 2017 2016
Contractual coupon interest $1,031
 $—
Amortization of debt issuance costs 18
 —
Amortization of debt discount 130
 —
Amortization of conversion feature 1,430
 —
Total $2,609
 $—

As of March 31, 2017, the December 2021 Notes are not convertible. At March 31, 2017, the if-converted value of the December 2021 Notes did not exceed the principal amount.



Capped Call Transaction

In connection with the offering of the December 2021 Notes, the Company entered into a privately-negotiated capped call transaction with an affiliate of the underwriter of such issuance. The aggregate cost of the capped call transaction was $14.4 million. The capped call transaction is generally expected to reduce the potential dilution upon conversion of the December 2021 Notes and/or partially offset any cash payments the Company is required to make in excess of the principal amount of converted December 2021 Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the capped call transaction, is greater than the strike price of the capped call transaction. This initially corresponds to the approximate $3.81 per share conversion price of the December 2021 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the December 2021 Notes. The cap price of the capped call transaction was initially $4.88 per share, and is subject to certain adjustments under the terms of the capped call transaction. The Company will not be required to make any cash payments to the option counterparty upon the exercise of the options that are a part of the capped call transaction, but the Company will be entitled to receive from it an aggregate amount of cash and/or number of shares of the Company’s common stock, based on the settlement method election chosen for the related convertible notes, with a value equal to the amount by which the market price per share of the Company’s common stock, as measured under the terms of the capped call transaction, is greater than the strike price of the capped call transaction during the relevant valuation period under the capped call transaction, with such number of shares of the Company’s common stock and/or amount of cash subject to the cap price.

The Company evaluated the capped call transaction under authoritative accounting guidance and determined that they should be accounted for as separate transactions and classified as a net reduction to additional paid-in capital within stockholders’ equity with no recurring fair value measurement recorded.

March 2015 Term Loan

On March 30, 2015, PDLthe Company entered into a credit agreement among the Company, the lenders party thereto and the Royal Bank of Canada, as administrative agent. The credit agreement consisted of a term loan of $100.0 million.

The interest rates per annum applicable to amounts outstanding under the term loan were, at the Company’s option, either (a) the alternate base rate (as defined in the credit agreement) plus 0.75%, or (b) the adjusted Eurodollar rate (as defined in the credit agreement) plus 1.75% per annum. As of February 12, 2016, the interest rate, based upon the adjusted Eurodollar rate, was 2.17%. Interest payments under the credit agreement were due on the interest payment dates specified in the credit agreement.

The credit agreement required amortization of the term loan in the form of scheduled principal payments on June 15, September 15 and December 15 of 2015, with the remaining outstanding balance due on February 15, 2016. This principal balance and outstanding interest was paid in full on February 12, 2016.

10.13. Other Long-Term Liabilities

Other long-term liabilities consist of the following:
 March 31, December 31, March 31, December 31,
 2016 2015 2017 2016
(In thousands)        
Accrued lease liability $10,700
 $10,700
 $10,700
 $10,700
Long-term incentive accrual 2,142
 1,318
 2,739
 1,995
Uncertain tax positions 39,989
 38,467
 29,973
 41,591
Dividend payable 229
 165
 149
 270
Total $53,060
 $50,650
 $43,561
 $54,556
 

In connection with the Spin-Off, wethe Company entered into amendments to the leases for ourthe Company’s 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 usthe Company 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 March 31, 2016,2017, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately $64.953.6 million. If Facet were to default, wethe Company could also be responsible for lease-related costs including utilities, property taxes and common area maintenance that may be as much as the actual lease payments. We have The Company has


recorded a liability of $10.7 million on ourthe Company’s Condensed Consolidated Balance Sheets as of March 31, 2016,2017, and December 31, 2015,2016, related to this guarantee.

11.14. Stock-Based Compensation

The Company grants restricted stock awards pursuant to a stockholder approved stock-based incentive plan. This incentive plan is described in further detail in Note 13,15, Stock-Based Compensation, of Notes to Condensed Consolidated Financial Statements in ourthe Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20152016.



The following table summarizes the Company’s stock option and restricted stock award activity during the three months ended March 31, 20162017:

   Restricted Stock Awards   Restricted Stock Awards
(In thousands except per share amounts) Shares Available for Grant Number of Shares Outstanding Weighted Average Grant-date Fair Value Per Share Shares Available for Grant Number of Shares Outstanding Weighted Average Grant-date Fair Value Per Share
Balance at December 31, 2015 4,684
 586
 $7.13
Balance at December 31, 2016 3,432
 1,472
 $3.96
Granted (828) 828
 3.21
 (1,524) 1,524
 $2.06
Balance at March 31, 2016 3,856
 1,414
 $4.82
Balance at March 31, 2017 1,908
 2,996
 $2.99

12. Cash Dividends
On January 26, 2016, our board of directors declared a quarterly dividend of $0.05 per share of common stock to stockholders of record on March 4, 2016. On March 11, 2016, we paid $8.2 million in connection with such dividend payment. Unvested RSAs as of the record date are also entitled to dividends, which will only be paid when the RSAs vest and are released.

13.15. Income Taxes
 
Income tax expense for the three months ended March 31, 2017 and 2016, and 2015, was $33.0$6.6 million and $49.0$33.0 million, respectively, which resulted primarily from applying the federal statutory income tax rate to income before income taxes. The Company’s effective tax rates for the current period differs from the U.S. federal statutory rate of 35% due primarily to the effect of Subpart F income as result of the product acquisition triggering U.S. tax on the Company’s pro rata share of income earned by Noden as a controlled foreign corporation. The Company intends to indefinitely reinvest all of its undistributed foreign earnings outside of the United States.

The uncertain tax positions increased during the three months ended March 31, 2017 and 2016, and 2015, by $1.2$0.8 million and $2.4$1.2 million, respectively, resulting from an increase in tax uncertainties and estimated tax liabilities.

In general, ourthe Company’s income tax returns are subject to examination by U.S. federal, state and local tax authorities for tax years 1996 forward. In May 2012, PDLthe Company received a “no-change” letter from the IRSInternal Revenue Service (“IRS”) upon completion of an examination of the Company'sCompany’s 2008 federal tax return. We areThe Company is currently under income tax examination in the state of California for the tax years 2009, 2010, 2011 and 2012. 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 dothe Company does not anticipate any material change to the amount of ourits unrecognized tax benefit over the next 12 months.

14. Accumulated Other Comprehensive Income16. Stockholders’ Equity

Comprehensive income is comprisedStock Repurchase Program

On March 1, 2017, the Company’s board of net incomedirectors authorized the repurchase through March 2018 of issued and outstanding shares of the Company’s common stock having an aggregate value of up to $30.0 million pursuant to a share repurchase program. The repurchases under the share repurchase program are made from time to time in the open market or in privately negotiated transactions and are funded from the Company’s working capital. The amount and timing of such repurchases are dependent upon the price and availability of shares, general market conditions and the availability of cash. Repurchases may also be made under a trading plan under Rule 10b-5, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other comprehensive income (loss). We include unrealized net gains (losses) on investmentsregulatory restrictions. The repurchase program may be suspended or discontinued at any time without notice. All shares of common stock repurchased under the Company’s share repurchase program will be retired and restored to authorized but unissued shares of common stock. The Company repurchased 3.9 million shares of its common stock under the share repurchase program during the period ended March 31, 2017 for an aggregate purchase price of $8.5 million, or an average cost of $2.16 per share. As of March 31, 2017, the Company had 590,000 shares held in our available-for-sale securitiestreasury stock at total cost of $1.3 million. Those shares were settled and unrealized gains (losses)retired on our cash flow hedgesApril 4, 2017.



17. Business Combinations

Description of the Noden Transaction

On July 1, 2016, Noden Pharma DAC, entered into an asset purchase agreement (“Noden Purchase Agreement”) where by it purchased from Novartis the exclusive worldwide rights to manufacture, market, and sell the branded prescription medicine product sold under the name Tekturna® and Tekturna HCT® in the United States and Rasilez® and Rasilez HCT® in the rest of the world (collectively the “Noden Products”) and certain related assets and assumed certain related liabilities (the “Noden Transaction”). In addition, pursuant the terms of the Noden Purchase Agreement, Noden Pharma DAC is committed to pay Novartis the following amounts in cash: $89.0 million payable on the first anniversary of the closing date, and up to an additional $95.0 million contingent on achievement of sales targets and the date of the launch of a generic drug containing the pharmaceutical ingredient aliskiren.

On July 1, 2016, upon the consummation of the Noden Transaction, a noncontrolling interest holder acquired a 6% equity interest in Noden Pharma DAC and Noden Pharma USA Inc. (together, with any subsidiaries, “Noden”). The equity interest of the noncontrolling interest holder is subject to vesting and repurchase rights over a four-year period. At March 31, 2017, 80% of the noncontrolling interest was subject to repurchase. The Company determined that Noden shall be consolidated under the voting interest model as of March 31, 2017.

Pursuant to the Noden Stockholders’ Agreements, the Company expects to make the following additional equity contributions to Noden: $32.0 million (and up to $89.0 million if Noden is unable to obtain debt financing) on July 1, 2017 to fund the anniversary payment under the Noden Purchase Agreement and at least $38.0 million to fund a portion of certain milestone payments under the Noden Purchase Agreement, subject to the occurrence of such milestones.

In connection with the Noden Transaction, Noden Pharma DAC and Novartis also entered into a supply agreement pursuant to which Novartis will manufacture and supply to Noden a finished form of the Noden Products and bulk drug form of the Noden Products for specified periods of time prior to the transfer of manufacturing responsibilities for the Noden Products to another manufacturer. Under the supply agreement, Novartis is also obligated to sell the Noden Products on a country-by-country basis during a specified time period prior to Noden Pharma DAC’s assumption of responsibility for sales of Noden Product in such country, and to share profits from such sales with Noden Pharma DAC on a specified basis. The supply agreement may be terminated by either party for material breach that remains uncured for a specified time period. The supply agreement and Noden Purchase Agreement include other comprehensive income (loss), and presenttransitional activities to be performed by Novartis, the amounts netpurpose of tax. Our other comprehensive income (loss)which is included in our Condensed Consolidated Statementsto effect a smooth transfer of Comprehensive Income.the marketing authorizations necessary to complete the ownership transfer to Noden Pharma DAC.

Fair Value of Consideration Transferred

The balancepreliminary fair value of accumulatedconsideration transferred totals $244.3 million, which consists of $216.7 million in acquired product rights, $23.9 million in customer relationships, $47.4 million in contingent consideration and $87.0 million in anniversary payments.  Contingent consideration includes the future payments that the Company may pay to Novartis based on achieving certain milestones.

The contingent consideration was measured at fair value and will be recognized as of the acquisition date. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from the Noden Products revenue estimates and a probability assessment with respect to the likelihood of achieving (a) the level of net sales or (b) generic product launch that would trigger the milestone payments. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

As of the effective time of the acquisition, the identifiable intangible assets are required to be measured at fair value and these assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other comprehensivethan their highest and best use. For purposes of the valuation, it is assumed that all assets will be used in the manner that represents the highest and best use of those assets, but it is not assumed that any market synergies will be achieved. The consideration of synergies has been excluded because they are not considered to be factually supportable.



The fair value of identifiable assets is determined primarily using the “income method,” which starts with a forecast of all expected future cash flows. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant, include, among other factors: the amount and timing of projected future cash flows (including net revenue, cost of product sales, research and development costs, sales and marketing expenses, income nettax expense, capital expenditures and working capital requirements) and estimated contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of tax,the asset’s life cycle and the competitive trends impacting the asset.

Goodwill represents expected synergies resulting from other intangible assets that do not qualify for separate recognition. Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired. Goodwill is not amortized but tested for impairment on an annual basis or when indications for impairment exist.

The following table presents a summary of the total fair value of consideration transferred for the Noden Products acquisition (in thousands):
Consideration paid in cash at closing $109,938
Discounted anniversary payment 87,007
Fair value of contingent consideration 47,360
Total fair value of consideration transferred $244,305

Assets Acquired and Liabilities Assumed

In accordance with the authoritative guidance for business combinations, the Noden Transaction was determined to be a business combination and is expected to be accounted for using the acquisition method of accounting. Due to the timing of the Noden Transaction, certain amounts are provisional and subject to change.  The provisional amounts consist primarily of the estimates of the fair value of intangible assets acquired and contingent consideration.  The Company will finalize these amounts as follows:we obtain the information necessary to complete the measurement process.  Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the provisional amounts recognized at the acquisition date.  These changes could be significant.  The Company will finalize these amounts no later than one year from the closing date.

The following table summarizes the fair values of the identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):
Acquired product rights $216,690
Customer relationships 23,880
Goodwill 3,735
Net intangible assets $244,305

The acquired product rights represent developed technology of products approved for sales in the market, which we refer to as marketed products, and have finite useful lives. They are amortized on a straight line basis over a weighted average of 10.0 years. These estimates will be adjusted accordingly if the final identifiable intangible asset valuation generates results, including corresponding useful lives and related amortization methods, which differ from the preliminary estimates, or if the above scope of intangible assets is modified.

Pro Forma Impact of Business Combination

The following table represents the unaudited consolidated financial information for the Company on a pro forma basis for the three months ended March 31, 2017 and 2016, assuming that the Noden Transaction had closed on January 1, 2015. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the acquisition and are expected to have a continuing impact on the consolidated results. Additionally, the following table sets forth unaudited financial information and has been compiled from historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transactions occurred on the dates indicated or that may be achieved in the future.


  Unrealized gains (losses) on available-for-sale securities Unrealized gains on cash flow hedges Total Accumulated Other Comprehensive Income
(In thousands)      
Beginning Balance at December 31, 2015 $435
 $1,821
 $2,256
Activity for the three months ended March 31, 2016 (17) (1,821) (1,838)
Ending Balance at March 31, 2016 $418
 $—
 $418
  Three Months Ended
  March 31,
  2017 2016
(in thousands)    
Pro forma revenues $45,440
 $138,847
Pro forma net income $7,241
 $61,393
Pro forma net income per share - basic $0.04
 $0.38
Pro forma net income per share - diluted $0.04
 $0.37

The unaudited pro forma consolidated results include historical revenues and expenses of assets acquired in the Noden Transaction with the following adjustments:
Adjustment to recognize incremental amortization expense based on the fair value of intangibles acquired;
Eliminate transaction costs and non-recurring charges directly related to the acquisition that were included in the historical results of operations for the Company; and
Adjustment to recognize pro forma income tax based on income tax benefit on the amortization of intangible asset at the statutory tax rate of Ireland (12.5%), and the income tax benefit on the interest expense at the statutory tax rate of the United States (35.0%).

18. Segment Information

Information regarding the Company’s segments for the three months ended March 31, 2017 and 2016 is as follows:
Revenues by segment Three Months Ended
  March 31,
(in thousands) 2017 2016
Income generating assets $32,859
 $103,124
Product sales 12,581
 —
Total revenues $45,440
 $103,124

Income (loss) by segment Three Months Ended
  March 31,
(in thousands) 2017 2016
Income generating assets $10,974
 $55,887
Product sales (3,733) —
Total net income $7,241
 $55,887

19. Subsequent Events

Merck Litigation Settlement

On April 21, 2017, the Company entered into a settlement agreement with Merck to resolve the patent infringement lawsuit between the parties pending in the U.S. District Court for the District of New Jersey related to Merck’s Keytruda humanized antibody product. For a further discussion of the settlement with Merck, see Note 11.

Office Lease Extension

On April 24, 2017, the Company extended its Incline Village, NV, office lease for an additional 36 months at approximately $14,500 per month. The office lease commitments associated with the extended office lease total approximately $0.5 million over the next 3 years.



Resignation of Noden’s CEO

Elie Farah resigned as chief executive officer and Director of Noden on April 20, 2017.  The Company is in process to re-acquire Mr. Farah’s equity interests in Noden.

Share Repurchase Program

From April 1, 2017 to April 28, 2017, the Company repurchased approximately 3.7 million shares of its common stock under the share repurchase program at a weighted average price of $2.16 per share for a total of $7.9 million. Since the inception of the share repurchase program in March 2017, the Company has repurchased approximately 7.6 million shares of its common stock for a total of $16.4 million.



ITEM 2.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Quarterly Report on Form 10-Q 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. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. 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. The forward-looking statements in this quarterly report are only predictions. 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 thecorrect. These forward-looking statements. Ourstatements, including with regards to 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 on Form 10-Q. All forward-looking statements and reasons why results may differ included in this Quarterly Report on Form 10-Q are made as of the date hereof,hereof. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we assume no obligationdo not plan to publicly update theseor revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or reasons why actual results might differ.otherwise.



 
OVERVIEW

PDL managesWe seek to provide a significant return for our shareholders by acquiring and managing a portfolio of companies, products, royalty agreements and debt facilities in the biotech, pharmaceutical and medical device industries. In 2012, we began providing alternative sources of capital through royalty monetizations and debt facilities, and in 2016, we began acquiring commercial-stage products and launching specialized companies dedicated to the commercialization of these products. To date, we have consummated 16 of such transactions. We have three debt transactions outstanding, representing deployed and committed capital of $210.0 million and $250.0 million, respectively: CareView, kaléo and LENSAR; we have one hybrid royalty/debt transaction outstanding, representing deployed and committed capital of $44.0 million: Wellstat Diagnostics; and we have five royalty transactions outstanding, representing deployed and committed capital of $396.1 million and $397.1 million, respectively: KYBELLA®, AcelRx, University of Michigan, Viscogliosi Brothers and Depomed. Our equity and loan investments in Noden represent deployed and committed capital of $110.0 million and $202.0 million, respectively.

In connection with our acquisition of Tekturna through Noden, described in more detail below under the heading “Contractual Obligations - Noden Purchase Agreement,” in July 2016, we began operating in two reportable segments: income generating assets and product sales. Our income generating assets segment consists of royalties from issued patents in the United States and royalty assets, consistingelsewhere, covering the humanization of itsantibodies, which we refer to as the Queen et al. patents, license agreements with various biotechnology and pharmaceutical companies, and royaltynotes and other assets acquired. To acquire newlong-term receivables, royalty rights - at fair value and equity investments. Our product sales segment consists of revenue derived from Tekturna®, Tekturna HCT®, Rasilez® and Rasilez HCT® (collectively, the “Noden Products” or “Tekturna”) sales. Prospectively, we expect to focus on the acquisition of additional products and expect to transact fewer royalty transactions and still fewer debt transactions. We anticipate that over time more of our revenues will come from our product sales segment and less of our revenues will come from our income generating assets PDLsegment.

Product Sales

We recently began acquiring, and plan to continue to acquire, commercial-stage products and companies who own or are acquiring pharmaceutical products. Our investment objective with respect to these transactions is to maximize our portfolio’s total return by generating current income from product sales. We consummated our first investment of this type with Tekturna in July 2016.

Noden Purchase Agreement

On July 1, 2016, Noden Pharma DAC, entered into an asset purchase agreement (“Noden Purchase Agreement”) whereby it purchased from Novartis Pharma AG (“Novartis”) the exclusive worldwide rights to manufacture, market, and sell the branded prescription medicine product sold under the name Tekturna® and Tekturna HCT® in the United States and Rasilez® and Rasilez HCT® in the rest of the world (collectively the “Noden Products”) and certain related assets and assumed certain related liabilities (the “Noden Transaction”). Upon the consummation of the Noden Transaction, a noncontrolling interest holder acquired 6% equity interests in Noden Pharma DAC and Noden Pharma USA, Inc. (together, with any subsidiaries, “Noden”). The equity interests of the noncontrolling interest holder are subject to vesting and repurchase rights over a four-year period. At March 31, 2017, 80% of the noncontrolling interest was subject to repurchase. We determined that Noden shall be consolidated under the voting interest model as of March 31, 2017.

Tekturna (or Rasilez outside the United States) contains aliskiren, a direct renin inhibitor, for the treatment of hypertension. While indicated as a first line treatment, it is more commonly used as a third line treatment in those patients who are intolerant of angiotensin converting enzyme inhibitors (“ACEs”) and angiotensin II receptor blockers (“ARBs”). It is not indicated for use with ACEs and ARBs in patients with diabetes or renal impairment. Tekturna HCT (or Rasilez HCT outside the United States) is a combination of aliskiren and hydrochlorothiazide, a diuretic, for the treatment of hypertension in patients not adequately controlled by monotherapy and as an initial therapy in patients likely to need multiple drugs to achieve their blood pressure goals. It is not indicated for use with ACEs and ARBs in patient with diabetes or renal impairment and not for use in patients with known anuria or hypersensitivity to sulfonamide derived drugs. Studies indicate that approximately 12% of hypertension patients are ACE/ARB inhibitor-intolerant. Tekturna and Tekturna HCT are contraindicated for use by pregnant women.

The agreement between Novartis and Noden provides non-dilutive growth capitalfor various transition periods for development and financing solutionscommercialization activities relating to late-stage publicthe Noden Products. Initially, Novartis will continue to distribute the four products on behalf of Noden worldwide and private healthcare companiesNoden will receive a profit transfer on such sales. In the United States, the duration of the profit transfer ran from July 1, 2016 through October 4, 2016. Outside the United States, the profit transfer is expected to run from July 1, 2016 through approximately mid-2017. The event that terminates the profit transfer arrangement is the transfer of the marketing aut


horization for the four products from Novartis to Noden. Generally, the profit transfer to Noden is defined as gross revenues less product cost, a low single digit percentage as a fee to Novartis. Prior to the transfer of the marketing authorization, revenue will be recognized on a “net” basis; after the transfer of the marketing authorization, revenue will be recognized on a “gross” basis.

Because Novartis has not actively commercialized the four products for a number of years, and offers immediate financial monetizationsales of royalty streamsthe four products have been declining annually since that time, the ability of Noden to companies, academic institutions,promote these four products successfully and inventors. PDL has committed over $1 billionefficiently will determine whether revenues can be stabilized and funded approximately $937 million in these investments to date. PDL evaluates its investments based on the quality of thegrown.

Income Generating Assets

We acquire income generating assets and potential returnswhen such assets can be acquired on investment. PDL is currently focused on acquiring newterms that we believe allow us to increase return to our stockholders. These income generating assets are typically in the managementform of its intellectual propertynotes receivables, royalty rights and hybrid notes/royalty receivables and in some cases, equity. We primarily focus our income generating asset acquisition strategy on commercial-stage therapies and medical devices having strong economic fundamentals. However, our acquired income generating assets will not, in the near term, replace completely the revenues we generated from our license agreements related to our Queen et al. patents. In the second quarter of 2016, our revenues materially decreased after we stopped receiving payments from certain Queen et al. patent licenses and maximizing valuelegal settlements, which accounted for its stockholders.68%, 82% and 83% of our 2016, 2015 and 2014 revenues.

Royalties from Queen et al. patents

While the Queen et al. patents have expired and the resulting royalty revenue has dropped substantially since the first quarter of 2016, we continue to receive royalty revenue from one product under the Queen et al. patent licenses, Tysabri®, as a result of sales of licensed product that was manufactured prior to patent expiry.

Royalty Rights - At Fair Value

We have entered into various royalty purchase agreements with counterparties, whereby the counterparty conveys to us the right to receive royalties that are typically payable on sales revenue generated by the sale, distribution or other use of the counterparties’ products. Certain of our royalty agreements provide the counterparty with the right to repurchase the royalty rights at any time for a specified amount.

We record the royalty rights at fair value using discounted cash flows related to the expected future cash flows to be received. We use significant judgment in determining our valuation inputs, including estimates as to the probability and timing of future sales of the licensed product. A third-party expert is generally engaged to assist us with the development of our estimate of the expected future cash flows. The Company was formerly known as Protein Design Labs, Inc.estimated fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. At each reporting period, an evaluation is performed to assess those estimates, discount rates utilized and changedgeneral market conditions affecting fair market value.

While we currently maintain this portfolio of royalty rights, our intention is to pursue fewer of these transactions while we focus on acquiring additional specialty pharmaceutical products or companies. At March 31, 2017, we had a total of five royalty rights transactions outstanding.

Notes and Other Long-Term Receivables

We have entered, and may continue to enter, into credit agreements with borrowers across the healthcare industry, under which we make available cash loans to be used by the borrower. Obligations under these credit agreements are typically secured by a pledge of substantially all the assets of the borrower and any of its namesubsidiaries. While we currently maintain this portfolio of notes receivable, our intention is to PDL BioPharma, Inc. in 2006. PDL was founded in 1986pursue fewer debt transactions, and is headquartered in Incline Village, Nevada. PDL pioneered the humanizationfocus on acquiring additional specialty pharmaceutical products or companies. At March 31, 2017, we had a total of monoclonal antibodiesthree notes receivable transactions outstanding and by doing so, enabled the discovery of a new generation of targeted treatments for cancer and immunologic diseases for which it receives significant one note/royalty revenue.(hybrid) receivable transaction outstanding.

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 was in December 2014, covered, among other


things, humanized antibodies, methods for humanizing antibodies, polynucleotide encoding in humanized antibodies and methods of producing humanized antibodies.

Our '761 Patent,U.S. patent No. 5,693,761 (the “761 Patent”), which expired on December 2, 2014, covered 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 ‘761761 Patent typically extended to the use or sale of compositions made with those methods and/or materials.

Our '216B PatentEuropean patent no. 0 451 216B (the “216B Patent”) expired in Europe in December 2009. We have been granted SPCsSupplementary Protection Certificates (“SPCs”) for the Avastin®, Herceptin®, Lucentis®, Xolair® and Tysabri® products in many of the jurisdictions in the European Union in connection with the ‘216B216B Patent. The SPCs effectively extended our patent protection with respect to Avastin, Herceptin, Lucentis, Xolair and Tysabri generally until December 2014, except that the SPCs for Herceptin expired in July 2014. Because SPCs are granted on a jurisdiction-by-jurisdiction basis, the duration of the extension varies slightly in certain jurisdictions. We expect to receive royalties beyond expiration of our patents and SPCs based on the terms of our licenses and our legal settlements. We do not expect to receive any meaningfulOur revenue from ourpayments made from the Queen et al. patents or the related license and settlement agreements beyondmaterially decreased in the firstsecond quarter of 2016.2016, with only revenue from Tysabri being recognized after such period.

Tekturna is protected by multiple patents worldwide, which specifically cover the composition of matter, the pharmaceutical formulations and methods of production. In the United States, the FDA Orange Book lists one patent, U.S. patent No. 5,559,111 (the “111 Patent”), which covers compositions of matter comprising aliskiren. The 111 Patent expires on July 21, 2018 unless a pediatric extension is granted, in which case it will expire on January 21, 2019. In addition, the FDA Orange Book for Tekturna lists U.S. Patent No. 8,617,595, which covers certain compositions comprising aliskiren, together with other formulation components, and will expire on February 19, 2026. The FDA Orange Book for Tekturna HCT lists U.S. patent No. 8,618,172, which covers certain compositions comprising aliskiren, together with other formulation components, and will expire on July 13, 2028. In Europe, European patent No. 678 503B (the “503B Patent”) expired in 2015. However, numerous SPCs have been granted which are based on the 503B Patent and which will provide for extended protection. These SPCs generally expire in April of 2020.

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. Although the Queen et al. patents and related rights have expired, we are entitled under our license agreements to continue to receive royalties in certain instances based on net sales of products that were made prior to but sold after patent expiry. In addition, we are entitled to royalties based on know-how provided to a licensee, noted below with respect to Lilly.licensee. 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 royalty based upon our licensees’ net sales of covered antibodies.

Our total revenues from licensees under our Queen et al. patents were $121.5$14.2 million and $127.8$121.5 million, net of rebates and foreign exchange hedge adjustments, for the three months ended March 31, 2017 and 2016, and 2015.


respectively.

Licensing Agreements for Marketed Products

In the three months ended March 31, 2017, we received royalties on sales of Tysabri, and in the three months ended March 31, 2016, and 2015, we received royalties on sales of the tenseven 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 Tysabri
Chugai
Actemra®
Roche
Gazyva®
Takeda
Entyvio®



Genentech

We entered into a master patent license agreement, effective September 25, 1998, under which we granted Genentech, Inc. (“Genentech”) a license under our Queen et al. patents to make, use and sell certain antibody products.

On January 31, 2014, we entered into the Settlement Agreement with Genentech and RocheF. Hoffman LaRoche, Ltd. (“Roche”) (“Settlement Agreement”) that resolved all existing legal disputes between the parties.

Under the terms of the Settlement Agreement, Genentech paid a fixed royalty rate of 2.125% on worldwide sales of Avastin, Herceptin, Xolair, Perjeta and Kadcyla occurring on or before December 31, 2015. As a result of the Settlement Agreement, PDL will no longer receive any royalties on these products after the first quarter of 2016. 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 owed no royalties on U.S. sales occurring after June 30, 2013, and paid a royalty of 2.125% 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 precludesprecluded Genentech and Roche from challenging the validity of PDL’sour patents, including itsour SPCs in Europe, from contesting their obligation to pay royalties to us, from contesting patent coverage for Avastin, Herceptin, Lucentis, Xolair, Perjeta, Kadcyla and Gazyva (collectively, the “Genentech Products”) and from assisting or encouraging any third party in challenging PDL’sour patents and SPCs. The Settlement Agreement further outlinesoutlined the conduct of any audits initiated by PDLus of the books and records of Genentech in an effort to ensure a full and fair audit procedure. Finally, the Settlement Agreement clarifiesclarified that the sales amounts from which the royalties are calculated do not include certain taxes and discounts. Under the terms of the Settlement Agreement, we ceased receiving any revenue from Genentech after the first quarter of 2016.

Biogen

We entered into a patent license agreement, effective April 24, 1998, under which we granted to Elan Corporation, plc (“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. OurThis 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. In April 2013, Biogen, Inc. (“Biogen”) completed its purchase of Elan'sElan’s interest in Tysabri. AllTysabri, and in connection with such purchase all obligations under our patent license agreement with Elan were assumed by Biogen.


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 United States prior to patent expiry. The agreement continued until the expiration of the last to expire of our Queen et al. patents. Chugai is obligated to pay us royalties on net sales occurring prior to the expiration of any Queen et al. patent which covers the manufacture, use or sale of Actemra. Because the relevant patent rights expired in the fourth quarter of 2014, we did not receive any revenues from Actemra after the first quarter of 2015.

Licensing Agreements for Non-Marketed Products

Solanezumab is a Lilly-licensed monoclonal antibody for the treatment of Alzheimer's disease. If this 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. The 2% royalty payable for "know-how" runs for 12.5 years after the product's initial commercialization. It is currently in Phase 3 testing with results expected in late 2016. On March 15, 2016, Lilly announced a change to the primary endpoint of this trial. The original trial design included co-primary endpoints of cognition and function. Lilly amended the trial design to include a single primary endpoint of cognition. The functional outcomes will be measured as key secondary endpoints. Lilly explained that the change was prompted by emerging scientific evidence that cognitive declines precede and predict functional declines. The change in endpoints affects the study’s data analysis but does not otherwise change the conduct of the study.

Income Generating Asset Acquisitions

The last of PDL’s Queen et al. patents expired in December 2014, and we expect a material decrease in payments related to the Queen et al. patents after the first quarter of 2016. Consequently, we have been acquiring income generating assets when such assets can be acquired on terms that allow us to increase the return to our stockholders. These income generating assets are typically in the form of notes receivables, royalty rights, hybrid notes/royalty receivables and in some cases equity. We primarily focus our income generating asset acquisition strategy on commercial stage therapies and medical devices having strong economic fundamentals. However, we do not expect that our acquired income generating assets will, in the near term, replace completely the revenues we generated from our license agreements related to the Queen et al. patents. In the second quarter of 2016, our revenues will materially decrease after we stop receiving payments from these Queen et al. patent licenses and legal settlements, which accounted for 82% of our 2015 revenues. The continued success of the Company will become more dependent on the timing and our ability to acquire new income generating assets in order to provide recurring revenues going forward and to support our business model and ability to pay dividends.

Notes and Other Long-Term Receivables

We enter into credit agreements with borrowers across the healthcare industry, under which PDL makes available cash advances to be used by the borrower. The obligations under the credit agreements are generally secured by a pledge of substantially all of the assets of the borrower and any of its subsidiaries.

At March 31, 2016, PDL had a total of six notes or notes/royalty (hybrid) receivable transactions outstanding, which are summarized below.

CareView

Deal Summary

In July 2015, PDL entered into a credit agreement with CareView, under which the Company made available to CareView up to $40.0 million in two tranches of $20.0 million each. Under the terms of the credit agreement each tranche has a five-year maturity and outstanding borrowings under the credit agreement will bear interest at the rate of 13.5% per annum and are payable quarterly in arrears. Principal repayment will commence on the ninth quarterly interest payment date of each tranche of loans. The principal amount outstanding at commencement of repayment will be repaid in equal installments until final maturity of the loans. In addition, PDL has a security interest in substantially all of CareView’s assets.



In October 2015, PDL funded the first tranche of $20.0 million. The additional $20.0 million in the form of a second tranche continues to be available upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and Consolidated EBITDA, to be accomplished no later than June 30, 2017.

Technology

CareView is a provider of products and on-demand application services for the healthcare industry by specializing in bedside video monitoring, archiving and patient care documentation systems and patient entertainment services.

kaléo

Deal Summary

In April 2014, PDL entered into a note purchase agreement with Accel 300, a wholly-owned subsidiary of kaléo, pursuant to which the Company acquired $150.0 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 the kaléo Revenue Interest and a pledge of kaléo's equity ownership in Accel 300.

The notes are backed by royalties in the form of 100 percent of the payments kaléo receives from its licensee based on net sales of kaléo’s first approved product, Auvi-Q (epinephrine auto-injection, USP) (known as Allerject™ in Canada) and 10 percent of net sales of kaléo’s second proprietary auto-injector based product, EVZIO (naloxone hydrochloride injection). The notes carry interest at 13% per annum, paid quarterly in arrears on principal outstanding. kaléo may redeem the notes at any time, subject to a redemption premium.

On February 18, 2016, PDL was advised that Sanofi and kaléo will terminate their license and development agreement later this year. On March 31, 2016, PDL was informed by kaléo that the license and development agreement was terminated and that all U.S. and Canadian commercial and manufacturing rights to Auvi-Q® and Allerject® had been returned to kaléo. All manufacturing equipment had also been returned to kaléo, and they intend to evaluate the timing and options for bringing Auvi-Q and Allerject back to the market. As part of our financing transaction, kaléo was required to establish an interest reserve account of $20.0 million from the $150.0 million provided by PDL. The purpose of this interest reserve account is to cover any possible shortfalls in interest payments owed to PDL. As of this date, despite the recall of Auvi-Q, it is projected that the interest reserve account alone is sufficient to cover possible interest shortfalls substantially through the second quarter of 2016. kaléo has indicated that it intends to make payments due to PDL under the note agreement until Auvi-Q is returned to the market.

Technology

Auvi-Q is used to treat life-threatening allergic reactions (anaphylaxis) in people who are at risk for or have a history of these reactions.

EVZIO is approved for the emergency treatment of known or suspected opioid overdose, as manifested by respiratory and/or central nervous system depression.

Paradigm Spine

Deal Summary

In February 2014, the Company entered into the Paradigm Spine Credit Agreement, 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 $50.0 million, net of fees, was funded by the Company at the close of the transaction. The second and third tranches of up to an additional $25.0 million in the aggregate, net of fees, are no longer available under the terms of the Paradigm Spine Credit Agreement.

Subsequently PDL and Paradigm Spine agreed to amend the credit agreement to provide additional term loan commitments of up to $7.0 million payable in two tranches of $4.0 million and $3.0 million, of which the first tranche was drawn on the closing date of the amendment, net of fees, and the second tranche is to be funded at the option of Paradigm Spine prior to June 30, 2016.

Borrowings under the credit agreement bear interest at the rate of 13.0% per annum, payable quarterly in arrears.



Under the terms of the Paradigm Spine Credit Agreement, 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 mature on February 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 Paradigm Spine 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.

Technology

Paradigm Spine’s coflex® interlaminar stabilization device for patients with spinal stenosis was approved by the FDA in late 2012.

Direct Flow Medical

Deal Summary

In November 2013, PDL entered into a credit agreement with Direct Flow Medical, under which PDL agreed to provide up to $50.0 million to Direct Flow Medical, to be used to refinance its existing credit facility and fund the commercialization of its transcatheter aortic valve system used to treat aortic stenosis. An initial $35.0 million was provided at the close of the transaction, with the remaining $15.0 million to be funded upon the achievement of a specified milestone. PDL funded the $15.0 million second tranche to Direct Flow Medical, net of fees in November 2014. Outstanding borrowings under the first tranche bore interest at the rate of 15.5% per annum, payable quarterly in arrears. Upon occurrence of the borrowing of this second tranche, the interest rate applicable to all loans under the credit agreement was decreased to 13.5% per annum, payable quarterly in arrears. 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.

On February 26, 2016, PDL and Direct Flow Medical enter into the fourth Amendment to the Credit Agreement that, among other things, (i) converted the $5.0 million short-term secured promissory note into a loan under the credit agreement with substantially the same interest and payment terms as the existing loans, (ii) added a conversion option providing the right to convert the additional $5.0 million loan into equity of Direct Flow Medical at the option of PDL and (iii) provided for an additional $5.0 million convertible loan tranche, to be funded at the option of PDL. In addition, (i) PDL agreed to waive the liquidity covenant and delay the timing of the unpaid interest payments until September 30, 2016 and (ii) Direct Flow Medical agreed to issue to PDL a specified amount of warrants to purchase shares of convertible preferred stock on the first day of each month for the duration of the waiver period at an exercise price of $0.01 per share. At March 31, 2016, we determined an estimated fair value of the warrant of $0.4 million.

Technology

The Direct Flow Medical develops transcatheter heart technologies, including its Transcatheter Aortic Valve System that is designed to treat aoritic stenosis.

LENSAR

Deal Summary

In October 2013, PDL entered into a credit agreement with LENSAR, under which PDL made available to LENSAR up to $60.0 million to be used by LENSAR in connection with the commercialization of its currently marketed LENSAR™ Laser System. Of the $60.0 million available to LENSAR, an initial $40.0 million was funded by the Company at the close of the transaction. The remaining $20.0 million in the form of a second tranche is no longer available to LENSAR under the terms of the credit agreement. Outstanding borrowings under the loans bore interest at the rate of 15.5% per annum, payable quarterly in arrears. The obligations under the credit agreement are secured by a pledge of substantially all of the assets of LENSAR.

In May 2015, PDL and LENSAR entered into a forbearance agreement as a result of LENSAR's failure to comply with a liquidity covenant and make interest payments due under the credit agreement. Between May and December 2015, PDL provided additional funding to LENSAR.



In December 2015, New LENSAR, a wholly owned subsidiary of Alphaeon assumed $42.0 million in loans as part of the borrowings under PDL’s original credit agreement with LENSAR in connection with Alphaeon's acquisition of substantially all of the assets of LENSAR. In addition, Alphaeon issued 1.7 million shares of its Class A common stock to PDL. Under the terms of the amended and restated credit agreement, PDL has a first lien security interest in substantially all of the equity interests and assets of New LENSAR. The loans bear interest of 15.5% per annum, payable quarterly in arrears. New LENSAR may elect to pay in kind interest the first three interest payments in the form of additional principal amount added to the loans. The principal repayment will commence on the ninth quarterly interest payment date. The principal amount of outstanding at commencement of repayment will be repaid in equal installments until final maturity of the loans, which is December 15, 2020.

Technology

The LENSAR Laser System is approved by the FDA to perform both corneal and arcuate incisions, as well as lens fragmentation and anterior capsulotomy (with or without phacofragmentation), during cataract surgery.

Wellstat

Deal Summary

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 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 receivable. This $10.0 million note receivable 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.

In November 2012, the Company and Wellstat Diagnostics entered into a $40.0 million credit agreement pursuant to which the
Company was to accrue quarterly interest payments at the rate of 5% per annum. In January 2013, Wellstat defaulted on the credit agreement, as a result both parties agreed to enter into a forbearance agreement whereby PDL agreed to provide additional funding. In August 2013, the Company entered into an amended and restated credit agreement with terms substantially the same as those of the original credit agreement. 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 were required to contribute additional capital to Wellstat Diagnostics upon the sale of an affiliate entity. The amended and restated credit agreement had an ultimate maturity date of December 31, 2021.

In August 2014, the Company delivered the Wellstat Diagnostics Borrower Notice which accelerated all obligations under the amended and restated credit agreement and demanded immediate payment in full in an amount equal to approximately $53.9 million. As of March 31, 2016, PDL is legally owed $108.4 million, which includes principal, un-accrued interest, and funded with respect to operations of Wellstat Diagnostics.

Technology

Wellstat Diagnostics, LLC is a private company dedicated to the development, manufacture, sale and distribution of small point of care diagnostic systems that can perform a wide variety of tests targeting the clinical diagnostics market.

Royalty Rights - At Fair Value

We enter into various royalty agreements with different counterparties, whereby the counterparty conveys to PDL the right
to receive royalties that are typically payable on sales generated by the sale, distribution or other use of the counterparties' products. Certain of our royalty agreements provide the counterparty with the right to repurchase the royalty rights at any time for a specified amount.

PDL records the royalty rights at fair value using discounted cash flows related to the expected future cash flows to be received. We use significant judgment in determining our valuation inputs, including estimates as to the probability and timing of future sales of the licensed product. A third-party expert is generally engaged to assist management with the development of its


estimate of the expected future cash flows. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. At each reporting period, an evaluation is performed to assess those estimates, discount
rates utilized and general market conditions affecting fair market value.

At March 31, 2016, PDL had a total of five royalty rights transactions outstanding, the most significant royalty transactions are summarized below.

AcelRx

Deal Summary

In September 2015, PDL entered into the AcelRx Royalty Agreement with ARPI LLC, a wholly owned subsidiary of AcelRx, whereby PDL acquired a portion of the royalties on expected sales of Zalviso™ (sufentanil sublingual tablet system) in the European Union, Switzerland and Australia by its commercial partner, Grünenthal. Under the terms of the agreement, PDL paid AcelRx $65.0 million, and in exchange, PDL will receive 75% of the royalties AcelRx receives from Grünenthal as well as 80% of the first four commercial milestones subject to a capped amount until the earlier of occur of (i) receipt by PDL of payments equal to three times the cash payments made to AcelRx and (ii) the expiration of the licensed patents.

Technology

Zalviso is a combination drug and device product which, using a patient controlled dispenser, delivers a sub-lingual formulation of sufentanil, an opioid with a high therapeutic index. Zalviso is approved in the European Union. Grünenthal is expected to launch Zalviso in the second quarter of 2016 and PDL expects to begin receiving royalties shortly thereafter.

ARIAD

Deal Summary

In July 2015, PDL entered into the ARIAD Royalty Agreement, whereby PDL agreed to provide ARIAD with up to $200.0 million in revenue interest financing in exchange for royalties based on the net revenues of Iclusig® (ponatinib). Funding of the first $50.0 million occurred on the closing date of the agreement and an additional $50.0 million is to be funded on the 12-month anniversary of the closing date. In addition, ARIAD has an option to draw up to an additional $100.0 million at any time between the sixth and twelfth month anniversaries of the closing date.

Under the terms of the ARIAD Royalty Agreement, PDL will initially receive 2.5% of the worldwide net revenues of Iclusig until the one year anniversary of the closing date, at which time the royalty increases to 5.0% of the worldwide net revenues of Iclusig and remains until December 31, 2018. Beginning January 1, 2019 and thereafter, the royalty rate will increase to 6.5%, subject to an additional increase to 7.5% if PDL’s funding exceeds $150.0 million. If PDL does not receive payments equal to or greater than the total amount funded on or before the fifth anniversary of each of the respective fundings, ARIAD will pay PDL the difference between the amounts funded by PDL and the amounts paid to such date. In addition, PDL may receive royalties on a product currently in development at ARIAD in the event of certain shortfalls. PDL has a put option based upon certain events and ARIAD has a call option to repurchase the revenue interest at any time. Both the put and call prices have been pre-determined.

Technology

Iclusig is approved in the U.S., EU, Australia, Israel, Canada and Switzerland. In the U.S., Iclusig is a kinase inhibitor indicated for the:

treatment of adult patients with T315I-positive chronic myeloid leukemia (chronic phase, accelerated phase, or blast phase) or T315I-positive Philadelphia chromosome positive acutelymphoblastic leukemia (Ph+ ALL).
treatment of adult patients with chronic phase, accelerated phase, or blast phase chronic myeloid leukemia or Ph+ ALL for whom no other tyrosine kinase inhibitor (TKI) therapy is indicated.



U-M

Deal Summary

In November 2014, PDL acquired a portion of the U-M worldwide royalty interest in Cerdelga™ (eliglustat) for $65.6 million. Cerdelga was approved in the US in August 2014, in the European Union in January 2015 and in Japan in March 2015. Under the terms of the Michigan Royalty Agreement, PDL will receive 75 percent of all royalty payments due under U-M’s license agreement with Genzyme until expiration of the licensed patents, excluding any patent term extension. The royalty rate used to calculate the royalties to be paid by Genzyme to U-M was not disclosed by the parties.

Technology

Cerdelga, an oral therapy for adult patients with Gaucher disease type 1, was developed by Genzyme, a Sanofi company. Cerdelga was approved by the FDA on August 19, 2014.

VB

Deal Summary

In June 2014, PDL entered into the VB Royalty Agreement, whereby PDL acquired the right to receive royalties on net sales of a pre-market approved spinal implant held by VB in exchange for $15.5 million cash payment. The royalty rights acquired include royalties accruing from and after April 1, 2014. PDL receives all royalty payments due to VB pursuant to certain technology transfer agreements between VB and Paradigm Spine until PDL has received payments equal to two and three tenths times the cash payment it made to VB, after which all payment rights 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 chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement were negotiated separately.

Technology

The coflex® Interlaminar Technology is an Interlaminar Stabilization® device indicated for use in one or two level lumbar stenosis from L1-L5 in skeletally mature patients with at least moderate impairment in function.

Depomed

Deal Summary

In October 2013, PDL entered into the Depomed Royalty Agreement, whereby PDL acquired the rights to receive royalties and milestones payable on sales of five Type 2 diabetes products licensed by Depomed in exchange for a $240.5 million cash payment.

Under the terms of the Depomed Royalty Agreement, the Company receives 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.

Technology

The rights acquired include Depomed’s royalty and milestone payments accruing from and after October 1, 2013: (a) from Valeant 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 N.V. 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.



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 included in “Item 1A. Risk Factors” in our Annual Reportannual report on formForm 10-K for the fiscal year ended December 31, 20152016 and our subsequent quarterly filings for additional factors that may impact our business and results of operations.

Dividend Payment

On January 26, 2016, our board of directors declared a quarterly dividend of $0.05 per share of common stock to stockholders of record on March 4, 2016. On March 11, 2016, we paid $8.2 million in connection with such dividend payment. Unvested RSAs as of the record date are also entitled to dividends, which will only be paid when the RSAs vest and are released.

Critical Accounting Policies and UsesUse of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on our limited historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the three months ended March 31, 2016,2017, there have been no significant changes to our critical accounting policies sinceand estimates from those presented in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016, that are of significance, or potential significance, to the Company.

Operating Results

Three months ended March 31, 20162017, compared to three months ended March 31, 20152016



Revenues

 Three Months Ended Change from Prior Three Months Ended Change from Prior
 March 31,  March 31, 
 2016 2015 Year % 2017 2016 Year %
(Dollars in thousands)            
Revenues            
Royalties from Queen et al. patents $121,455
 $127,810
 (5%) $14,156
 $121,455
 (88%)
Royalty rights - change in fair value (27,102) 11,362
 (339%) 13,146
 (27,102) (149%)
Interest revenue 8,964
 10,534
 (15%) 5,457
 8,964
 (39%)
Product revenue, net 12,581
 —
 N/M
License and other (193) —
 N/M 100
 (193) (152%)
Total revenues $103,124
 $149,706
 (31%) $45,440
 $103,124
 (56%)
_______________________
N/M = Not meaningful

Total revenues were $103.1 million and $149.7$45.4 million for the three months ended March 31, 2016 and 2015, respectively. During2017, compared with $103.1 million for the three months ended March 31, 2016 and 2015, our Queen et al. royalty2016. Our total revenues consisted of royalties earned on sales of products under license agreements associated with our Queen et al. patents. Duringdeclined by 56%, or $57.7 million, for the three months ended March 31, 2017, when compared to the same period of 2016. The decrease was primarily due to the expiration of the patent license agreement with Genentech, partially offset by the increase in estimated fair value of the Depomed royalty assets recognized in revenues, as well as due to the product revenues from the Noden Products.

Revenue from our product sales segment for the three months ended March 31, 2017 were $12.6 million, an increase of 100% compared to the same period last year. All product revenues were derived from sales of the Noden Products. While we acquired the exclusive worldwide rights to manufacture, market, and sell the Noden Products from Novartis on July 1, 2016, Novartis was still the primary obligor during the first quarter of 2017 for ex-U.S. sales, therefore revenue is presented on a “net” basis for the first quarter in 2017 for all ex-U.S. sales. Our revenue recognition policies require estimated product returns, pricing discounts including rebates offered pursuant to mandatory federal and 2015,state government programs and chargebacks, prompt pay discounts and distribution fees and co-pay assistance for product sales at each period.

The following table provides a summary of activity with respect to our sales allowances and accruals for the three months ended March 31, 2017:
(in thousands) Discount and Distribution Fees Government Rebates and Chargebacks Assistance and Other Discounts Product Return Total
Balance at December 31, 2016: $2,475
 $5,514
 $2,580
 $1,769
 $12,338
Allowances for current period sales 2,243
 4,939
 2,264
 1,235
 10,681
Allowances for prior period sales —
 253
 —
 —
 253
Credits/payments for current period sales (453) —
 —
 —
 (453)
Credits/payments for prior period sales (1,451) (3,746) (556) —
 (5,753)
Balance at March 31, 2017 $2,814
 $6,960
 $4,288
 $3,004
 $17,066

Revenue from our income generating assets segment for the three months ended March 31, 2017 were $32.9 million, a decrease of 68.1%, or $70.3 million, compared to the same period last year, primarily due to the reduction in royalties related to the Queen et al. patents from $121.5 million to $14.2 million because we ceased receiving revenue from Genentech after the first quarter of 2016. This decrease was partially offset by an increase in royalty rights - change in fair value. Net cash royalty payments for the first quarter in 2017 were $13.5 million, compared with $17.2 million in the same period of the previous year.



The following tables provides a summary of activity with respect to our royalty rights - change in fair value consisted of revenues associated with the change in fair value of our royalty right assets, Depomed, U-M, VB, ARIAD, Avinger and AcelRx. Revenues for the three months ended March 31, 2015, are net of the payments made under the 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. No royalties were received on Lucentis sales after the first quarter of 2015 and consequently no payments were made to Novartis.2017 (in thousands):

Total revenues decreased by 31% for the three months ended March 31, 2016, when compared to the same period in 2015. The decrease is primarily driven by the decrease in the Depomed royalty rights as the result of the recent generic competition for Glumetza, decreased interest revenues due to the Direct Flow Medical impairment and no interest revenues being recognized, decreased interest revenues due to the early payoff of the Avinger note receivable, and the conclusion of the Actemra and Lucentis license agreements, partially offset by increased royalties from sales of Perjeta, Xolair and Kadcyla and the conclusion of the Novartis rebate payments on sales of Lucentis.


    Change in Royalty Rights -
  Cash Royalties Fair Value Change in Fair Value
Depomed $8,853
 $(2,432) $6,421
VB 381
 174
 555
U-M 824
 299
 1,123
ARIAD 3,081
 (462) 2,619
AcelRx 20
 2,113
 2,133
Avinger 305
 (248) 57
KYBELLA 30
 208
 238
  $13,494
 $(348) $13,146

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 three months ended March 31, 20162017 and 2015:

2016:
 Three Months Ended Three Months Ended
   March 31,   March 31,
Licensee Product Name 2016 2015 Product Name 2017 2016
Genentech Avastin 38% 26% Avastin —% 38%
 Herceptin 38% 25% Herceptin —% 38%
 Xolair 13% 7% Xolair —% 13%
        
Biogen Tysabri 14% 10% Tysabri 31% 14%
    
Depomed Glumetza, Janumet XR, Jentadueto XR and Invokamet XR 14% N/M
    
Novartis/Noden Tekturna, Tekturna HCT, Rasilez and Rasilez HCT 28% —%
    
kaléo Interest revenues 10% 5%
_______________________
N/M = Not meaningful

Foreign currency exchange rates also impact our reported revenues.revenues, primarily from licenses of the Queen et al. patents. 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 otherwise would have been had the U.S. dollar not weakened.strengthened. For example, in a quarter in which we generate $70.0$10.0 million in royalty revenues, and when approximately $35.0$5.0 million isof such royalty revenues are based on sales in currencies other than U.S. dollar, if the U.S. dollar strengthens across all currencies by 10% during the reporting 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$0.5 million less in the current quarter than in the prior year'syear’s quarter.

For the three months ended March 31, 2016, and 2015, we hedged certain Euro-denominated currency exposures related to our licensees’ product sales with Euro forward contracts. We designated 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 was recorded in stockholders’ equity as "Accumulated“Accumulated other comprehensive income"income”. Realized gains or losses on cash flow hedges were recognized as an adjustment to royalty revenue in the same period that the hedged transaction impacts earnings. For the three months ended March 31, 20162017 and 20152016, we recognized $2.8 millionzero and $1.0$2.8 million, respectively, as additions in royalty revenues from our Euro forward contracts.
 


Operating Expenses

 Three Months Ended Change from Prior Three Months Ended Change from Prior
 March 31,  March 31, 
 2016 2015 Year % 2017 2016 Year %
(In thousands)            
Cost of product revenue, (excluding intangible amortization) $2,552
 $—
 N/M
Amortization of intangible assets 6,015
 —
 N/M
General and administrative $9,846
 $7,666
 28% 12,576
 9,846
 28%
Sales and marketing 2,584
 —
 N/M
Research and development 1,766
 —
 N/M
Change in fair value of acquisition-related contingent consideration 1,442
 —
 N/M
Total operating expenses $26,935
 $9,846
 174%
Percentage of total revenues 10% 5%  59% 10% 
____________________
N/M = Not meaningful

The increase in operating expenses for the three months ended March 31, 2016,2017, as compared to the same period in 2015,2016, was a result of the product sales segment acquisition, contributing an increaseadditional $2.9 million of cost of product revenue, $6.0 million of acquisition intangible amortization, $2.3 million in sales and marketing, $1.8 million in research and development costs for the completion of a pediatric trial for the acquired branded prescription medicines Tekturna, $1.4 million in a change in fair value in acquisition-related contingent consideration and $1.1 million in general and administrative expenses. General administrative expenses increased by $2.7 million of $1.5which $1.3 million for legal services mostly relatedrelates to the asset management expenses for LENSAR and Direct Flow Medical and approximately $1.4 million of Wellstat Diagnostics and $0.9 millionadditional expenses due to an increase in headcount for compensation, including stock-based compensation expenses.the Noden Products acquisition.

Non-operating Expense, Net

Non-operating expense, net, decreased,increased, in part, primarily due to the decreaseincrease in interest expense from the expirationDecember 2021 Note entered into during the fourth quarter of 2016, partially offset by the partial repayment of the Series 2012February 2018 Notes and May 2015 Notes during the three months ended March 30, 2015.in November 2016. The decrease in interest expense for the three months ended March 31, 2016,2017, as compared to the same period in 2015,2016, 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 March 31, 2017 and 2016, and 2015, was $33.0$6.6 million and $49.0$33.0 million, respectively, which resulted primarily from applying the federal statutory income tax rate to income before income taxes. Our effective tax rates for the current period differs from the U.S. federal statutory rate of 35% due primarily to the effect of Subpart F income as result of the product acquisition triggering U.S. tax on our pro rata share of income earned by Noden as a controlled foreign corporation during the transitional service period. We intend to indefinitely reinvest all our undistributed foreign earnings outside the United States.

The uncertain tax positions increased during the three months ended March 31, 2017 and 2016, and 2015, by $1.2$0.8 million and $2.4$1.2 million, respectively, resulting from an increase in tax uncertainties and estimated tax liabilities.

In general, our income tax returns are subject to examination by U.S. federal, state and local tax authorities for tax years 1996 forward. In May 2012, PDL received a “no-change” letter from the IRS upon completion of an examination of the Company's 2008 federal tax return. We are currently under income tax examination in the state of California for tax years 2009, 2010, 2011 and 2012. 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 benefit over the next 12 months.


Net Income per Share
 
Net income per share for the three months ended March 31, 20162017 and 20152016, is presented below:

Three Months EndedThree Months Ended
March 31,March 31,
2016 20152017 2016
Net income per share - basic$0.34
 $0.52
$0.04
 $0.34
Net income per share - diluted$0.34
 $0.50
$0.04
 $0.34

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.capital and revenues from product sales. We currently have one part-time and ten full-time employees managing our intellectual property, our asset acquisitions 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 short-term investments in the aggregate of $292.0$334.3 million and $220.4$167.1 million at March 31, 2016,2017, and December 31, 2015,2016, respectively. The increase was primarily attributable to the change in ownership of the ARIAD royalty right asset for $108.2 million, proceeds from royalty right payments of $17.2$13.5 million, the repayment of a note receivable balance of $7.9 million and cash generated by operating activities of $92.5$45.8 million, partially offset in part by the repaymentrepurchase of the March 2015 Term Loancommon stock for $25.0 million, payment of dividends of $8.2$7.6 million and an additional note receivablethe purchase of $5.0fixed assets of $0.5 million.

On March 1, 2017, the we announced that our board of directors authorized the repurchase of up to $30.0 million of our common stock through March 2018. The repurchases under the share repurchase program are made from time to time in the open market or in privately negotiated transactions and are funded from the our working capital. The amount and timing of such repurchases are dependent upon the price and availability of shares, general market conditions and the availability of cash. Repurchases may also be made under a trading plan under Rue 10b5-1, which would permit shares to be repurchased when we might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The repurchase program may be suspended or discontinued at any time without notice. All shares of common stock repurchased under the our share repurchase program were retired and restored to authorized but unissued shares of common stock. We repurchased 3.9 million shares of its common stock under the share repurchase program during the period ended March 31, 2017 for an aggregate purchase price of $8.5 million, or an average cost of $2.16 per share.

Although the last of our Queen et al. patents expired in December 2014, we expect to receivehave received royalties beyond expiration based on the terms of our licenses and our legal settlements. We believe that cash from future revenues from acquired income generating assets, 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. However, we do not expect that our acquired income generating assets will not result in cash flows to us, in the near term, that will replace the cashflowscash flows we received from our license agreements related to the Queen et al. patents. In the second quarter of 2016, our cashflows willcash flows materially decreasedecreased after we stopstopped receiving payments from thesecertain of the Queen et al. patent licenses and our legal settlements. TheOur continued success of the Company will become significantly moreis dependent on the timing and our ability to acquire new income generating assets and products, and the timing of these transactions, in order to provide recurring cash flows going forward and to support our business model, and ability to pay dividends.amounts due on our debt as they become due.

We continuously evaluate alternatives to increase return for our stockholders, by,including, for example, purchasing income generating assets, selling discreet assets, buying back our convertible notes, repurchasing our common stock paying dividends and selling the Company. On January 26, 2016, our board of directors declared a quarterly dividend of $0.05 per share of common stock, payable on March 11 of 2016 to stockholders of record on March 4 of 2016, the record date for the dividend payments.company.


We may consider additional debt or equity financings to support the growth of our business if cash flows from existing investments are not sufficient to fund future potential investment opportunities and acquisitions.

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 receivable 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 receivable. This $10.0 million note receivable 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 was to accrue quarterly interest payments at the rate of 5% per annum (payable in cash or in kind). In addition, PDL was to 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.

On August 15, 2013, the owners and affiliates of Wellstat Diagnostics completed a financing transaction to fulfill Wellstat Diagnostics' 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 was to 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 were required to contribute additional capital to Wellstat Diagnostics upon the sale of an affiliate entity. The amended and restated credit agreement had an ultimate maturity date of December 31, 2021 (but has subsequently been accelerated as described below).

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 was to be 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 constituted 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 included 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 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 the Wellstat Diagnostics Borrower Notice. The Wellstat Diagnostics Borrower Notice accelerated all obligations under the amended and restated credit agreement and demanded immediate payment in full in an amount equal to approximately $53.9 million, (which amount, in accordance with the terms of the amended and restated credit agreement, included 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 demanded that Wellstat Diagnostics protect and preserve all collateral securing its obligations. On August 7, 2014, the Company delivered the Wellstat Diagnostics Guarantor Notice. The Wellstat Diagnostics Guarantor Notice included 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, including Wellstat Therapeutics and Wellstat Diagnostics’ stockholders.

On September 24, 2014, the Company filed the Wellstat Diagnostics Petition, which was granted on the same day. The order granting the Wellstat Diagnostics Petition authorizes the receiver to take immediate possession of the physical assets of Wellstat Diagnostics, with the purpose of holding, protecting, insuring, managing and preserving the business of Wellstat Diagnostics and the value of the Company’s collateral. Wellstat Diagnostics has remained in operation during the period of the receivership with incremental additional funding from the Company.

On November 4, 2014, the Company entered into the third amendment to the amended and restated credit agreement with Wellstat Diagnostics. The amendment provides that additional funding, if any, to be made by the Company is conditioned upon the agreement by Wellstat Diagnostics to make certain operational changes within Wellstat Diagnostics, which the Company believes will allow the receiver to more efficiently optimize the value of the collateral.

During the second quarter of 2015, the receiver initiated a process for a public sale of the assets of Wellstat Diagnostics and retained the investment banking firm of Duff & Phelps to organize and manage the sale process. The receiver filed a "Motion For Approval of Sale Procedures" with the Circuit Court for Montgomery County, Maryland, which is the court having jurisdiction over the receivership and a hearing was held on July 22, 2015 at which time arguments were heard from interested parties regarding the sale procedures. No significant substantive disagreements between the parties regarding the sale procedures remained after the hearing and a decision approving the receiver’s sale procedures was made in the third quarter of 2015. PDL submitted a credit bid for the Wellstat Diagnostic assets at a value corresponding to some portion of the outstanding amount due under the amended and restated credit agreement which is subject to court approval. A hearing was scheduled in the Maryland Circuit Court for April 13, 2016 to hear the Receiver’s motion to approve the credit bid sale to PDL. However, on April 12, 2016, Wellstat Diagnostics changed its name to Defined Diagnostics, LLC and filed for bankruptcy under Chapter 11 in the United Stated Bankruptcy Court in the Southern District of New York. The filing of the bankruptcy case stays the proceedings in the Maryland Circuit Court pursuant to the automatic stay provisions of the Bankruptcy Code.

On September 4, 2015, PDL filed in the Supreme Court of New York a motion for summary judgment in lieu of complaint which requested that the court enter judgment against Wellstat Diagnostics Guarantors for the total amount due on the Wellstat Diagnostics debt, plus all costs and expenses including lawyers’ fees incurred by the Company in enforcement of the related guarantees. On September 23, 2015, PDL filed in the same court an ex parte application for a temporary restraining order and order of attachment of the Wellstat Diagnostics Guarantors' assets. At a hearing on September 24, 2015, regarding the Company’s request for a temporary restraining order, the court ordered that the Company’s request for attachment and for summary judgment would be heard at a hearing on November 5, 2015. Although the court denied the Company’s request for a temporary restraining order at the hearing on September 24, it ordered that assets of the Wellstat Diagnostics Guarantors should be held in status quo ante and only used in the normal course of business pending the outcome of the hearing. The court in New York has yet to rule on the Company's motions for attachment and summary judgment.

On October 22, 2015, the Wellstat Diagnostics Guarantors filed a complaint against the Company in the Supreme Court of New York seeking a declaratory judgment that certain contractual arrangements entered into between the parties subsequent to Wellstat Diagnostics’ default, and which relate to a split of proceeds in the event that the Wellstat Diagnostics Guarantors voluntarily monetize any assets that are the Company’s collateral, is of no force or effect.



Through the period ended March 31, 2016, PDL has advanced to Wellstat Diagnostics $15.2 million to fund the ongoing operations of the business and other associated costs. This funding has been expensed as incurred. As of March 31, 2016, PDL is owed $108.4 million, which includes unpaid principal and interest and repayment of amounts funded for ongoing operations of Wellstat Diagnostics.

Effective April 1, 2014, and as a result of the event of default, we determined the loan to be impaired and we ceased to accrue interest revenue. At that time and as of March 31, 2016 it has been determined that an allowance on the carrying value of the note was not necessary as the Company believes the value of the collateral securing Wellstat Diagnostics’ obligations exceeds the carrying value of the asset and is sufficient to enable the Company to recover the current carrying value of $50.2 million. There can be no assurance that this will be true in the event of the Company’s foreclosure on the collateral, nor can there be any assurance of the timing in realizing value from such collateral, whether from the sale process currently underway or a subsequent monetization event if PDL's credit bid for the assets is successful.

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 each of March 5, 2013 and 2014. The first payment of $1.2 million was paid on March 5, 2013, but Hyperion has not made the second payment that was due on March 5, 2014. The Company completed an impairment analysis as of March 31, 2016. Effective with this date and as a result of the event of default, we ceased to accrue interest revenue. As of March 31, 2016, the estimated fair value of the collateral was determined to be in excess of that of the carrying value. There can be no assurance that this will be true in the event of the Company's foreclosure on the collateral, nor can there be any assurance of realizing value from such collateral.

AxoGen Note Receivable and AxoGen Royalty Agreement

In October 2012, PDL entered into the AxoGen Royalty Agreement with AxoGen providing for the payment of specified royalties to PDL 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 had an eight-year term and provided PDL with royalties of 9.95% based on AxoGen's net revenues, subject to agreed-upon guaranteed quarterly minimum payments of approximately $1.3 million to $2.5 million, which began in the fourth quarter of 2014, and the right to require AxoGen to repurchase the royalties under the AxoGen Royalty Agreement at the end of the fourth year. AxoGen was 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. The royalty rights were secured by the cash and accounts receivable of AxoGen.

On August 14, 2013, PDL purchased 1,166,666 shares of registered common stock of AxoGen (AXGN) at $3.00 per share, totaling $3.5 million. On December 22, 2014, PDL sold these shares at $3.03 per share, totaling approximately $3.5 million.

On November 13, 2014, the Company agreed to terminate the AxoGen Royalty Agreement in consideration for a payment of $30.3 million in cash, which was the sum of the outstanding principal, interest and embedded derivative.

At the same time, the Company acquired 643,382 shares of registered common stock of AxoGen for approximately $1.7 million at a public offering price of $2.72 per share. The shares are classified as available for sale securities and recorded as short-term investments on the Condensed Consolidated Balance Sheets. In the third and fourth quarters of 2015, PDL sold 200,000 and 149,650 shares, respectively, at a price range between $5.46 and $5.69 per share, totaling approximately $1.9 million.

In March 2016, PDL sold on the open market 50,000 shares of AxoGen’s common stock at $5.44 per share, resulting in a gain totaling approximately $136,000.Off-Balance Sheet Arrangements

As of March 31, 2016, PDL held 243,732 shares of AxoGen common stock, which were valued at $1.3 million, which resulted in an unrealized gain of $0.6 million and is recorded in "Other comprehensive income (loss), net of tax."



Avinger Credit and Royalty Agreement

On April 18, 2013, PDL entered into the Avinger Credit and Royalty Agreement, 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 available to Avinger, we funded an initial $20.0 million, net of fees, at the close of the transaction. Outstanding borrowings under the initial loan bore interest at a stated rate of 12% per annum.

On September 22, 2015, Avinger elected as per the voluntary prepayment provision under the Avinger Credit and Royalty Agreement to prepay the note receivable in whole for a payment of $21.4 million in cash, which was the sum of the outstanding principal, interest and a prepayment fee.

Under the terms of the Avinger Credit and Royalty Agreement, the Company receives a low, single-digit royalty on Avinger's net revenues until April 2018. Commencing in October 2015, after Avinger repaid the note receivable prior to its maturity date, the royalty on Avinger's net revenues reduced by 50%, subject to certain minimum payments from the prepayment date until April 2018. PDL has accounted for the royalty rights in accordance with the fair value option.

LENSAR Credit Agreement

On October 1, 2013, PDL entered into a credit agreement with LENSAR, under which PDL made available to LENSAR up to $60.0 million to be used by LENSAR in connection with the commercialization of its currently marketed LENSAR™ Laser System. Of the $60.0 million available to LENSAR, an initial $40.0 million, net of fees, was funded by the Company at the close of the transaction. The remaining $20.0 million in the form of a second tranche is no longer available to LENSAR under the terms of the credit agreement. Outstanding borrowings under the loans bore interest at the rate of 15.5% per annum, payable quarterly in arrears.

On May 12, 2015, PDL entered into a forbearance agreement with LENSAR under which PDL agreed to refrain from exercising certain remedies available to it resulting from the failure of LENSAR to comply with a liquidity covenant and make interest payments due under the credit agreement. Under the forbearance agreement, PDL agreed to provide LENSAR with up to an aggregate of $8.5 million in weekly increments through the period ended September 30, 2015 plus employee retention amounts of approximately $0.5 million in the form of additional loans subject to LENSAR meeting certain milestones related to LENSAR obtaining additional capital to fund the business or selling itself and repaying outstanding amounts under the credit agreement. In exchange for the forbearance, LENSAR agreed to additional reporting covenants, the engagement of a chief restructuring officer and an increase on the interest rate to 18.5%, applicable to all outstanding amounts under the credit agreement.

On September 30, 2015, PDL agreed to extend the forbearance agreement until October 9, 2015 and provide for up to an additional $0.8 million in funding while LENSAR negotiated a potential sale of its assets. On October 9, 2015, the forbearance agreement expired, but PDL agreed to fund LENSAR's operations while LENSAR continued to negotiate a potential sale of its assets.

On November 15, 2015, New LENSAR, a wholly owned subsidiary of Alphaeon, and LENSAR entered into the Asset Purchase Agreement whereby New LENSAR agreed to acquire substantially all the assets and assumed certain liabilities of LENSAR subject to the satisfaction of certain closing conditions. The acquisition was consummated on December 15, 2015.

In connection with the closing of the acquisition, New LENSAR entered into an amended and restated credit agreement with PDL, assuming $42.0 million in loans as part of the borrowings under PDL’s prior credit agreement with LENSAR. In addition, Alphaeon issued 1.7 million shares of its Class A common stock to PDL.

Under the terms of the amended and restated credit agreement, PDL has a first lien security interest in substantially all of the equity interests and assets of New LENSAR. The loans bear interest of 15.5% per annum, payable quarterly in arrears. New LENSAR may elect to pay in kind interest the first three interest payments in the form of additional principal amount added to the loans. The principal repayment will commence on the ninth interest payment date. The principal amount outstanding at commencement of repayment is to be repaid in equal installments until final maturity of the loans which is December 15, 2020.

PDL concluded that the amendment and restatement of the original LENSAR credit agreement shall be accounted for as a troubled debt restructuring due to the concession granted by PDL and LENSAR’s financial difficulties. PDL has recognized a loss on extinguishment of notes receivable of $4.0 million and expensed $3.0 million of closing fees as general & administrative costs as incurred at closing on December 15, 2015.



We have estimated a fair value of $3.84 per share for the 1.7 million shares of Alphaeon Class A common stock received in connection with the transactions and recognized this investment as a cost-method investment of $6.6 million included in other long-term asset. The Alphaeon Class A common stock is subject to other-than-temporary impairment assessments in future periods. There is no other-than-temporary impairment charge incurred as of March 31, 2016.

Direct Flow Medical Credit Agreement

On November 5, 2013, PDL entered into a credit agreement with Direct Flow Medical, under which PDL agreed to 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. Pursuant to the original terms of the credit agreement the Company agreed to provide Direct Flow Medical with an additional $15.0 million tranche, net of fees, upon the attainment of a specified revenue milestone to be accomplished no later than December 31, 2014 (the tranche two milestone). Until the occurrence of the tranche two milestone, outstanding borrowings under tranche one bore interest at the rate of 15.5% per annum, payable quarterly in arrears.

On November 10, 2014, PDL and Direct Flow Medical agreed to an amendment to the credit agreement to permit Direct Flow Medical to borrow the $15.0 million second tranche upon receipt by Direct Flow Medical of a specified minimum amount of proceeds from an equity offering prior to December 31, 2014. In exchange, the parties amended the credit agreement to provide for additional fees associated with certain liquidity events, such as a change of control or the consummation of an initial public offering, and granted PDL certain board of director observation rights. On November 19, 2014, upon Direct Flow Medical satisfying the amended tranche two milestone, the Company funded the $15.0 million second tranche to Direct Flow Medical, net of fees. Upon occurrence of the borrowing of this second tranche, the interest rate applicable to all loans under the credit agreement was decreased to 13.5% per annum, payable quarterly in arrears.

Under the terms of the credit agreement, principal repayment will commence on the 12th 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 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.

On December 21, 2015, Direct Flow Medical and PDL entered into a waiver to the credit agreement in anticipation of Direct Flow Medical being unable to comply with the liquidity covenant and make interest payments due under the credit agreement.

On January 14, 2016, both parties agreed to provide Direct Flow Medical with an extension to waive the liquidity covenant and delay the timing of the interest payments through the period ending September 30, 2016.

On January 28, 2016, PDL funded an additional $5.0 million to Direct Flow Medical in the form of a short-term secured promissory note.

On February 26, 2016, PDL and Direct Flow Medical entered into the fourth Amendment to the Credit Agreement that, among other things, (i) converted the $5.0 million short-term secured promissory note into a loan under the credit agreement with substantially the same interest and payment terms as the existing loans, (ii) added a conversion option providing the right to convert the additional $5.0 million loan into equity of Direct Flow Medical at the option of PDL and (iii) provided for an additional $5.0 million convertible loan tranche, to be funded at the option of PDL. In addition, (i) PDL agreed to waive the liquidity covenant and delay the timing of the unpaid interest payments until September 30, 2016 and (ii) Direct Flow Medical agreed to issue to PDL a specified amount of warrants to purchase shares of convertible preferred stock on the first day of each month for the duration of the waiver periodat an exercise price of $0.01 per share. At March 31, 2016, we determined an estimated fair value of the warrant of $0.4 million.

The Company completed an impairment analysis as of March 31, 2016. Effective as of this date and as a result of the waived defaults, we determined the loan to be impaired and we ceased to accrue interest revenue. As of March 31, 2016, the estimated fair value of the collateral was determined to be in excess of that of the carrying value. In the event the Company was to foreclose on the collateral, there can be no assurance as to the accuracy of the estimated fair value of the collateral, nor can there be any assurance of realizing value from such collateral.



Paradigm Spine Credit Agreement

On February 14, 2014, the Company entered into the Paradigm Spine Credit Agreement, 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 $50.0 million, net of fees, was funded by the Company at the close of the transaction. The second and third tranches of up to an additional $25.0 million in the aggregate, net of fees, are no longer available under the terms of the Paradigm Spine Credit Agreement.

On October 27, 2015, PDL and Paradigm Spine entered into an amendment to the Paradigm Spine Credit Agreement to provide additional term loan commitments of up to $7.0 million payable in two tranches of $4.0 million and $3.0 million, of which the first tranche was drawn on the closing date of the amendment, net of fees, and the second tranche is to be funded at the option of Paradigm Spine prior to June 30, 2016.

Borrowings under the credit agreement bear interest at the rate of 13.0% per annum, payable quarterly in arrears.

Under the terms of the Paradigm Spine Credit Agreement, principal repayment will commence on the 12th 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 mature on February 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 Paradigm Spine 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 $150.0 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 the kaléo Revenue Interests and a pledge of kaléo’s equity ownership in Accel 300.

The secured notes bear interest at 13% per annum, paid quarterly in arrears on principal outstanding. The principal balance of the secured notes is repaid to the extent that the kaléo Revenue Interests exceed the quarterly interest payment, as limited by a quarterly payment cap. The final maturity of the secured notes is June 2029. kaléo may redeem the secured notes at any time, subject to a redemption premium.

As of March 31, 2016, the Company determined that its royalty purchase interest in Accel 300 represented a variable interest in a variable interest entity. However, the Company does not have the power to direct the activities of Accel 300 that most significantly impact Accel 300's economic performance and is not the primary beneficiary of Accel 300; therefore, Accel 300 is not subject to consolidation by the Company.

On October 28, 2015, Sanofi US initiated a voluntary nationwide recall of all Auvi-Q®units effectively immediately. Sanofi is the exclusive licensee of kaléo for the manufacturing and commercialization of Auvi-Q. While Sanofi has not identified the reason for the recall, press reports indicate that a small number of units have failed to activate or delivered inadequate doses of epinephrine. Subsequent to the recall, kaléo made a full and timely payment of $9.5 million, which included all principal and interest due in the fourth quarter of 2015.

On February 18, 2016, PDL was advised that Sanofi and kaléo will terminate their license and development agreement later this year. On March 31, 2016, PDL was informed by kaléo that the license and development agreement was terminated and that all U.S. and Canadian commercial and manufacturing rights to Auvi-Q® and Allerject® had been returned to kaléo. All manufacturing equipment had also been returned to kaléo, and they intend to evaluate the timing and options for bringing Auvi-Q and Allerject back to the market. As part of our financing transaction, kaléo was required to establish an interest reserve account of $20.0 million from the $150.0 million provided by PDL. The purpose of this interest reserve account is to cover any possible shortfalls in interest payments owed to PDL. As of this date, despite the recall of Auvi-Q, it is projected that the interest reserve account alone is sufficient to cover possible interest shortfalls substantially through the second quarter of 2016. kaléo has indicated that it intends to make payments due to PDL under the note agreement until Auvi-Q is returned to the market.



PDL will monitor the timing and options for bringing Auvi-Q back to the market and how it may impact the ability of kaléo to meet its obligations under the note purchase agreement, but as of March 31, 2016, it has been determined that there is no impairment.

CareView Credit Agreement

On June 26, 2015, PDL entered into a credit agreement with CareView, under which the Company made available to CareView up to $40.0 million in two tranches of $20.0 million each. Under the terms of the credit agreement, the first tranche of $20.0 million was to be funded by the Company upon CareView’s attainment of a specified milestone relating to the placement of CareView Systems®, to be accomplished no later than October 31, 2015. The Company expects to fund CareView an additional $20.0 million upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and Consolidated EBITDA (as defined in the credit agreement), to be accomplished no later than June 30, 2017. Outstanding borrowings under the credit agreement will bear interest at the rate of 13.5% per annum and are payable quarterly in arrears.

As part of the transaction, the Company received a warrant to purchase approximately 4.4 million shares of common stock of CareView at the exercise price of $0.45 per share. We have accounted for the warrant as derivative asset with an offsetting credit as debt discount. At each reporting period the warrant is marked to market for changes in fair value.

On October 7, 2015, PDL and CareView entered into an amendment of the credit agreement to modify certain definitions related to the first and second tranche milestones. On this date, PDL also funded the first tranche of $20.0 million, net of fees, upon attainment of the modified first tranche milestone relating to the placement of CareView Systems. The additional $20.0 million in the form of a second tranche continues to be available upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and Consolidated EBITDA, to be accomplished no later than June 30, 2017, under the terms of the amended credit agreement.

In connection with the amendment of the credit agreement, PDL and CareView also agreed to amend the warrant to purchase common stock agreement by reducing the warrant's exercise price from $0.45 to $0.40 per share. At March 31, 2016, we determined an estimated fair value of the warrant of $0.7 million.

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 (which was subsequently acquired by Salix, which itself was recently acquired by Valeant Pharmaceuticals) 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 tablets); (c) from Janssen Pharmaceutica N.V. with respect to potential future development milestones and sales of its investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin tablets; (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 tablets in Korea and Canada, respectively.

Under the terms of the Depomed Royalty Agreement, the Company receives 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 March 31, 2016, and December 31, 2015, the Company determined that its royalty purchase interest in Depo DR Sub represented a variable interest in a variable interest entity. 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 financial asset acquired represents a single unit of accounting. The fair value of the financial 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 financial 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 flows are based upon expected royalties from sales of licensed products over a seven-year period. The discount rates utilized range from approximately 21% to 25%. Significant judgment is required in selecting appropriate discount rates. At March 31, 2016, an evaluation was performed to assess those rates and general market conditions potentially affecting the fair market value. Should these discount rates increase or decrease by 2.5%, the fair value of the asset could decrease by $7.6 million or increase by $8.5 million, respectively. A third-party expert was engaged to help management develop its original estimate of the expected future cash flows. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. We periodically assess the expected future cash flows and to the extent such payments are greater or less than our initial estimates, or the timing of such payments is materially different than our original estimates, we will adjust the estimated fair value of the asset. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $3.6 million or decrease by $3.6 million, respectively.

When PDL acquired the Depomed royalty rights, Glumetza was marketed by Santarus. In January 2014, Salix acquired Santarus and assumed responsibility for commercializing Glumetza, which was generally perceived to be a positive development because of Salix's larger sales force and track record in the successful commercialization of therapies. In late 2014, Salix made a number of disclosures relating to an excess of supply at the distribution level of Glumetza and other drugs that it commercialized, the practices leading to this excess of supply which were under review by Salix's audit committee in relation to the related accounting practices. Because of these disclosures and PDL's lack of direct access to information as to the levels of inventory of Glumetza in the distribution channels, PDL commenced a review of all public statements by Salix, publicly available historical third-party prescription data, analyst reports and other relevant data sources. PDL also engaged a third-party expert to specifically assess estimated inventory levels of Glumetza in the distribution channel and to ascertain the potential effects those inventory levels may have on expected future cash flows. Salix was acquired by Valeant Pharmaceuticals in early April 2015. In mid-2015, Valeant Pharmaceuticals implemented two price increases on Glumetza. At year-end 2015, a third-party expert was engaged by PDL to assess the impact of the Glumetza price adjustments and near-term market entrance of manufacturer of generic equivalents to Glumetza to the expected future cash flows. Management revised based on the analysis performed the underlying assumptions used in the discounted cash flow analysis at year-end 2015. In February 2016, a manufacturer of generic equivalents to Glumetza entered the market. At March 31, 2016, management evaluated, with assistance of a third-party expert, the erosion of market share data, the gross-to-net revenue adjustment assumptions and Glumetza demand data. These data and assumptions are based on available but limited data. Our expected future cash flows at year-end 2015 anticipated a reduction in future cash flows of Glumetza as a result of the generic competition in 2016. However, based on the most recent demand and supply data of Glumetza it appears that the loss of market share progressed more rapidly than forecasted at year-end 2015.

As of March 31, 2016, our discounted cash flow analysis reflects our expectations as to the amount and timing of future cash flows up to the valuation date. We continue to monitor whether the generic competition further affects sales of Glumetza and thus royalties on such sales paid to PDL. Due to the uncertainty around Valeant's marketing and pricing strategy, as well as the recent generic competition and limited historical demand data after generic market entrance, we may need to further reduce future cash flows in the event of more rapid reduction in market share of Glumetza. PDL exercised its audit right under the Depomed Royalty Agreement with respect to the Glumetza royalties in January 2016 and expects to conclude the audit in the second half of 2016.

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 spinal implant that has received pre-market approval from the FDA, in exchange for a $15.5 million cash payment, less fees.

The royalty rights acquired include royalties accruing from and after April 1, 2014. Under the terms of the VB Royalty Agreement, the Company receives 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 chief executive officer of Paradigm Spine is one of the owners of VB. The Paradigm Spine Credit Agreement and the VB Royalty Agreement were negotiated separately.

The fair value of the royalty right at March 31, 2016, 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 an eight-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 $1.2 million or increase by $1.4 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $0.4 million or decrease by $0.4 million, respectively. A third-party expert was engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. At each reporting period, an evaluation is performed to assess those estimates, discount rates utilized and general market conditions affecting fair market value.

U-M Royalty Agreement

On November 6, 2014, PDL acquired a portion of all royalty payments of the U-M’s worldwide royalty interest in Cerdelga (eliglustat) for $65.6 million. Under the terms of the Michigan Royalty Agreement, PDL will receive 75% of all royalty payments due under U-M’s license agreement with Genzyme until expiration of the licensed patents, excluding any patent term extension. Cerdelga, an oral therapy for adult patients with Gaucher disease type 1, was developed by Genzyme, a Sanofi company. Cerdelga was approved in the United States on August 19, 2014, in the European Union on January 22, 2015 and in Japan in March 2015. In addition, marketing applications for Cerdelga are under review by other regulatory authorities.

The fair value of the royalty right at March 31, 2016, 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 seven-year period. The discount rate utilized was approximately 12.8%. 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 $5.6 million or increase by $6.3 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.8 million or decrease by $1.8 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. 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 affecting fair market value is performed at each reporting period.

ARIAD Royalty Agreement

On July 28, 2015, PDL entered into the ARIAD Royalty Agreement, whereby the Company acquired the rights to receive royalties payable from ARIAD's net revenues generated by the sale, distribution or other use of Iclusig® (ponatinib), a cancer medicine for the treatment of adult patients with chronic myeloid leukemia, in exchange for up to $200.0 million in cash payments. The purchase price of $100.0 million is payable in two tranches of $50.0 million each, with the first tranche funded on the closing date and the second tranche to be funded on the 12-month anniversary of the closing date. The ARIAD Royalty Agreement provides ARIAD with an option to draw up to an additional $100.0 million in up to two draws at any time between the six- and 12-month anniversaries of the closing date. ARIAD may repurchase the royalty rights at any time for a specified amount. Upon the occurrence of certain events, PDL has the right to require ARIAD to repurchase the royalty rights for a specified amount. Under the ARIAD Royalty Agreement, the Company has the right to a make-whole payment from ARIAD if the Company does not receive payments equal to or greater than the amounts funded on or prior to the fifth anniversary of each of the respective fundings. In such case, ARIAD will pay to the Company the difference between the amounts paid to such date by ARIAD (excluding any delinquent fee payments) and the amounts funded by the Company. PDL has elected the fair value option to account for the hybrid instrument in its entirety. Any embedded derivative shall not be separated from the host contract.

Under the terms of the ARIAD Royalty Agreement, the Company receives royalty payments at a royalty rate ranging from 2.5% to 7.5% of Iclusig revenue until the first to occur of (i) repurchase of the royalty rights by ARIAD or (ii) December 31, 2033. The annual royalty payments shall not exceed $20.0 million in any fiscal year for the years ended December 31, 2015 through December 31, 2018. If Iclusig revenue does not meet certain agreed-upon projections on an annual basis, PDL is entitled to certain royalty payments from net revenue of another ARIAD product, brigatinib, up to the amount of the shortfall from the projections for the applicable year. 



The asset acquired pursuant to the ARIAD Royalty Agreement represents a single unit of accounting. The fair value of the royalty right at March 31, 2016, 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 seven-year period. The discount rate utilized was approximately 10.0%. 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 $7.9 million or increase by $9.1 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.3 million or decrease by $1.3 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. 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 affecting fair market value is performed in each reporting period.

AcelRx Royalty Agreement

On September 18, 2015, PDL entered into the AcelRx Royalty Agreement with ARPI LLC, a wholly owned subsidiary of AcelRx, whereby the Company acquired the rights to receive a portion of the royalties and certain milestone payments on sales of Zalviso™ (sufentanil sublingual tablet system) in the European Union, Switzerland and Australia by AcelRx's commercial partner, Grünenthal, in exchange for a $65.0 million cash payment. Under the terms of the AcelRx Royalty Agreement, the Company will receive 75% of all royalty payments and 80% of the first four commercial milestone payments due under AcelRx's license agreement with Grünenthal until the earlier to occur of (i) receipt by the Company of payments equal to three times the cash payments made to AcelRx and (ii) the expiration of the licensed patents. Zalviso received marketing approval by the European Commission in September 2015. Grüenthal is expected to launch Zalviso in the Second quarter of 2016 and PDL will begin receiving royalties shortly thereafter.

As of March 31, 2016, and December 31, 2015, the Company determined that its royalty rights under the agreement with ARPI LLC represented a variable interest in a variable interest entity. However, the Company does not have the power to direct the activities of ARPI LLC that most significantly impact ARPI LLC's economic performance and is not the primary beneficiary of ARPI LLC; therefore, ARPI LLC is not subject to consolidation by the Company.

The fair value of the royalty right at March 31, 2016, 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 fifteen-year period. The discount rate utilized was approximately 13.4%. 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 $10.2 million or increase by $12.8 million, respectively. Should the expected royalties increase or decrease by 2.5%, the fair value of the asset could increase by $1.7 million or decrease by $1.7 million, respectively. A third-party expert is engaged to assist management with the development of its estimate of the expected future cash flows, when deemed necessary. The fair value of the asset is subject to variation should those cash flows vary significantly from our estimates. At each reporting period, an evaluation of those estimates, discount rates utilized and general market conditions affecting fair market value is performed in each reporting period.

Dr. Stephen Hoffman is the President of 10x Capital, Inc., a third-party consultant to the Company, and is also a member of the board of directors of AcelRx. Dr. Hoffman recused himself from the AcelRx board of directors with respect to the entirety of its discussions and considerations of the transaction. Dr. Hoffman is being compensated for his contribution to consummate this transaction by PDL as part of his consulting agreement. PDL concluded Dr. Hoffman is not considered a related party in accordance with FASB ASC 850, Related Party Disclosures and SEC Regulation S-X, Related Party Transactions Which Affect the Financial Statements.

Avinger Credit and Royalty Agreement

On April 18, 2013, PDL entered into the Avinger Credit and Royalty Agreement, under which we made available to Avinger up to $40.0 million (of which only $20.0 million was funded) to be used by Avinger in connection with the commercialization of its lumivascular catheter devices and the development of Avinger's lumivascular atherectomy device. On September 22, 2015, Avinger elected to prepay the note receivable in whole for a payment of $21.4 million in cash.



Under the terms of the Avinger Credit and Royalty Agreement, the Company was entitled to receive royalties at a rate of 1.8% on Avinger's net revenues until the note was repaid by Avinger. Upon the repayment of the note receivable, which occurred on September 22, 2015, the royalty rate was reduced to 0.9% subject to certain minimum payments from the prepayment date until April 2018. The Company has accounted for the royalty rights in accordance with the fair value option. The fair value of the royalty right at March 31, 2016, 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 two-year period. The discount rate utilized was approximately 15.0%. Significant judgment is required in selecting the appropriate discount rate. Should this discount rate increase or decrease by 5%, the fair value of this asset could decrease by $113,000 or increase by $126,000, respectively. Should the expected royalties increase or decrease by 5%, the fair value of the asset could increase by $116,000 or decrease by $116,000, respectively. Management considered the contractual minimum payments when developing 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 affecting fair market value is performed in each reporting period.

Convertible Note
February 2018 Notes

On February 12, 2014, we issued $300.0 million in aggregate principal amount, at par, of the February 2018 Notes in an underwritten public offering, for net proceeds of $290.2 million. The February 2018 Notes are due February 1, 2018, and we pay interest at 4.0% on the 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 the 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 the 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.

On November 20, 2015, PDL's agent initiated the repurchase of $53.6 million in aggregate principal amount of its February 2018 Notes for $43.7 million in cash in four open market transactions. The closing of these transactions occurred on November 30, 2015.

It was determined that the repurchase of the principal amount shall be accounted for as an extinguishment. As a result, a gain on extinguishment of $6.5 million was recorded at closing of the transaction. The $6.5 million gain on extinguishment included the de-recognition of the original issuance discount of $3.1 million, outstanding deferred issuance costs of $0.9 million and agent fees of $0.1 million. Immediately following the repurchase, $246.4 million principal amount of the February 2018 Notes was outstanding with $14.1 million of remaining original issuance discount and $4.1 million of debt issuance costs to be amortized over the remaining life of the February 2018 Notes. As of March 31, 2016, our February 2018 Notes are not convertible. At March 31, 2016, the if-converted value of our February 2018 Notes did not exceed the principal amount.

In connection with the repurchase of the February 2018 Notes, the Company and the counterparties agreed to unwind a portion of the purchased call options. As a result of this unwinding, PDL received $270,000 in cash. The payments received have been recorded as an increase to APIC. In addition, the Company and the counterparties agreed to unwind a portion of the warrants for $170,000 in cash, payable by PDL. The payments have been recorded as a decrease to APIC. At March 31, 2016, PDL concluded that the remaining purchased call options and warrants continue to meet all criteria for equity classification.

The February 2018 Notes are convertible under any of the following circumstances:

During any fiscal quarter ending after the quarter ended 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 the Company's 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 the Company's 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 the 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 the February 2018 Notes and increases interest expense during the term of the February 2018 Notes from the 4.0% cash coupon interest rate to an effective interest rate of 6.9%. As of March 31, 2016, the remaining discount amortization period is 1.8 years.

Purchased Call Options and Warrants

In connection with the issuance of the 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 the February 2018 Notes. The purchased call options cover, subject to anti-dilution and certain other customary adjustments substantially similar to those in the February 2018 Notes, approximately 32.7 million shares of our common stock. We may exercise the purchased call options upon conversion of the 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 the 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 the 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 the 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 March 31, 2016. 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.

Off-Balance Sheet Arrangements

As of March 31, 2016, we did not have any off-balance sheet arrangements, as defined under SEC Regulation S-K Item 303(a)(4)(ii).



Contractual Obligations

Convertible NoteNotes

As of March 31, 2016,2017, our convertible note obligation consisted of our February 2018 Notes and December 2021 Notes, which in the aggregate totaled $246.4$276.4 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 and December 2021 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 to be available on favorable terms.

Notes Receivable and Other Long-Term Receivables

On June 26, 2015, PDL entered into aPursuant to our credit agreement with CareView, under which the Companywe made available to CareView up to $40.0 million in two tranches of $20.0 million each. TheWe funded the first tranche of $20$20.0 million, was to be funded by the Companynet of fees, upon CareView’s attainment of a specified milestone relating to the placement of CareView Systems, to be accomplished no later thanon October 31,7, 2015. The Company will fund CareView an additional $20.0 million upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and EBITDA, to be accomplished no later than June 30, 2017.

On October 7, 2015, PDL and CareView agreed to an amendment ofwe amended the credit agreement to modify certain definitions related to the first and second tranche milestones. On this date, the Company funded the first tranche of $20.0 million, net of fees, upon attainment of the modified first tranche milestone relating to the placement of CareView Systems. The additional $20.0 million in the form of a second tranche continues to be available upon CareView’s attainment of specified milestones relating to the placement of CareView Systems and Consolidated EBITDA,consolidated earnings before interest, taxes, depreciation and amortization, to be accomplished no later than June 30, 2017 under the terms of the amended credit agreement.

On October 27, 2015, PDL and Paradigm Spine entered into an amendment toAugust 29, 2016, we received approximately $57.5 million in connection with prepayment of the loans under the Paradigm Spine Credit Agreement, which included a repayment of the full principal amount outstanding of $54.7 million, plus accrued interest and a prepayment fee.

Noden Purchase Agreement

Pursuant to providestockholder agreements pertaining to our investment in Noden (the “Noden Stockholders’ Agreement”), we will make the following additional term loan commitments ofequity contributions to Noden: $32.0 million (and up to $7.0$89.0 million payable in two tranchesif Noden is unable to obtain debt financing) on July 1, 2017 to fund the anniversary payment under the Noden Purchase Agreement, and at least $38.0 million to fund a portion of $4.0 millioncertain milestone payments under the Noden Purchase Agreement, subject to the occurrence of such milestones. In exchange for such equity contributions, we were issued and $3.0 million,will be issued ordinary shares and preferred shares. For a separate contribution, certain management of which the first tranche of $4.0 millionNoden was drawn on the closing date of the amendment, net of fees,also issued preferred and the second tranche of $3.0 million isordinary shares subject to be funded at the option of Paradigm Spine prior to June 30, 2016.certain vesting restrictions.

Kybella Royalty Rights - At Fair ValueAgreement

On July 28, 2015, PDL8, 2016, we entered into a revenue interests assignmentroyalty purchase and sales agreement with ARIAD pursuantan individual, whereby we acquired that individual’s rights to receive certain royalties on sales of KYBELLA by Allergan, in exchange for a $9.5 million cash payment and up to $1.0 million in future milestone payments based upon product sales targets.

Guarantees
Novartis Anniversary Payment Guarantee

On June 30, 2016, we purchased a $75.0 million certificate of deposit, which ARIAD soldis designated as cash collateral for the $75.0 million letter of credit issued on July 1, 2016 with respect to the Companyfirst anniversary payment under the rightNoden Purchase Agreement. In addition, we provided an irrevocable and unconditional guarantee to receive specified royalties on ARIAD’s Net Revenues (as defined in the ARIAD Royalty Agreement) generated by the sale, distribution or other use of ARIAD’s product Iclusig (ponatinib). In exchange for the ARIAD Royalty Rights, the ARIAD Royalty Agreement provides for the funding ofNovartis, to pay up to $200.0$14.0 million in cash to ARIAD. Fundingof the remaining amount of the first $100.0 million willanniversary payment not covered by the letter of credit. We concluded that both guarantees are contingent obligations and shall be madeaccounted for in two tranches of $50.0 million each,accordance with ASC 450, Contingencies. Further, it was concluded that both guarantees do not meet the initial amount funded on the closing date of the ARIAD Royalty Agreement and an additional $50.0 millionconditions to be funded on the 12-month anniversary of the closing date. In addition, ARIAD has an option to draw up to an additional $100.0 million in up to two drawsaccrued at any time between the six- and 12-month anniversaries of the closing date.March 31, 2017.



Redwood City Lease Guarantee
 
In connection with the Spin-Off of Facet, 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

Purchase Obligation

In connection with the landlord asNoden Transaction, Noden entered into an unconditional purchase obligation with Novartis to acquire all local finished goods inventory in certain countries upon transfer of the applicable marketing authorization rights in such country. The purchase is payable within 60 days after the transfer of the marketing authorization rights. The agreement does not specify quantities but details pricing terms.

In addition, Noden and Novartis entered into a co-tenantsupply agreement pursuant to which Novartis will manufacture and thus, we have in substance guaranteedsupply to Noden a finished form of the payments underNoden Products and bulk drug form of the lease agreementsNoden Products for specified periods of time prior to the transfer of manufacturing responsibilities for the Redwood City facilities. AsNoden Products to another manufacturer. The supply agreement commits Noden to a minimum purchase obligation of March 31, 2016,approximately $9.6 million and $120.7 million over the total lease payments for the duration of the guarantee, which runs through December 2021, were approximately $64.9 million.next twelve and twenty-four months, respectively. Noden expects to meet this requirement.

We recorded a liability of $10.7 million on our Condensed Consolidated Balance Sheets as of March 31, 2016, and December 31, 2015, for the estimated liability resulting from this guarantee. We prepared a discounted, probability-weighted cash flow analysis to calculate the estimated fair value of the lease guarantee as of the Spin-Off. We were required to make assumptions regarding the probability of Facet’s default on the lease payment, the likelihood of a sublease being executed and


the times at which these events could occur. These assumptions are based on information that we received from real estate brokers and the then-current economic conditions, as well as expectations of future economic conditions. The fair value of this lease guarantee was charged to additional paid-in capital upon the Spin-Off and any future adjustments to the carrying value of the obligation will also be recorded in additional paid-in capital. In future periods, we may increase the recorded liability for this obligation if we conclude that a loss, which is larger than the amount recorded, is both probable and estimable.

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.


ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk

Our investment portfolio was approximately $200.9 million at As of March 31, 2016, and $96.3 million at December 31, 2015, and consisted of investments in Rule 2a-7 money market funds and a corporate security. If market interest rates were to have increased by 1% in either of these years,2017, there would have been no material impactchanges in our market risk from that described in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our annual report on Form 10-K for the fair value of our portfolio.

The aggregate fair value of our convertible notes was estimated to be $220.6 million at March 31, 2016, and $197.9 million at fiscal year ended December 31, 2015, based on available pricing information. At March 31, 2016, and December 31, 2015, our convertible note consisted of our February 2018 Notes, with a fixed interest rate of 4.0%. This obligation is subject to interest rate risk because the fixed interest rate under this obligation may exceed current market interest rates.2016.



ITEM 4.        CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.March 31, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2016,2017, our disclosure controls and procedures were effective to ensure the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.effective.
 
Changes in Internal ControlsControl Over Financial Reporting

There werehave been no changes in our internal controlscontrol over financial reporting that occurred during the quarter ended March 31, 2016,2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, on July 1, 2016, we acquired the Noden Products. In accordance with the SEC’s published guidance, our Annual Report on Form 10-K for the year ending December 31, 2016 did not include consideration of the internal controls of the acquired Noden Products within management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2016. We are in the process of integrating the acquired Noden Products into our overall internal control over financial reporting process and will incorporate the acquired Noden Products into our annual assessment of internal control over financial reporting as of December 31, 2017.
 
Limitations on the Effectiveness of Controls
 
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis, and no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. We continue to improve and refine our internal controls and our compliance with existing controls is an ongoing process.



PART II. OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

Reference is hereby madeThe information set forth in Note 11 “Commitments and Contingencies” to our disclosures in “Commitment and contingencies” under Note 8Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q and the information under the headings "PDL BioPharma, Inc. v Merck Sharp & Dohme, Corp", "Wellstat Litigation" and “Other Legal Proceedings” is incorporated by reference herein.

ITEM 1A.        RISK FACTORS

During the three months ended March 31, 2016, there wereThere have been no material changes to the risk factors included in “Item 1A. Risk Factors” in our Annual Reportannual report on Form 10-K for the fiscal year ended December 31, 2015. Please carefully consider2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the period covered by this report.

Issuer Purchases of Equity Securities

The following table contains information set forth in this Quarterly Report on Form 10-Q andrelating to the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2015, as well as other risks and uncertainties, could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of sharesrepurchases of our common stock. Additional risks not currently known or currently materialstock made by us in the quarter ended March 31, 2017 (in thousands):
Fiscal Period Total Number of Shares Repurchased Average Price Paid Per Share Total Number of Shares Purchased As Part of a Publicly Announced Program 
Approximate Dollar Amount of Shares That May Yet be Purchased Under the Program (1)
January 1, 2017toJanuary 31, 2017 — $—
 — $—
February 1, 2017toFebruary 28, 2017 — —
 — —
March 1, 2017toMarch 31, 2017 3,938 2.16
 3,938 21,486
Total during quarter ended March 31, 2017 3,938 $2.16
 3,938 $21,486
_____________________
(1) On March 1, 2017, the Company’s board of directors authorized the repurchase through March 2018 of issued and outstanding shares of the Company’s common stock having an aggregate value of up to us may also harm our business.$30.0 million pursuant to a share repurchase program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6.    EXHIBITS

The exhibits listed in the exhibit index following the signature page are filed or furnished as part of this report.



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Dated:May 4, 20163, 2017 
PDL BIOPHARMA, INC. (REGISTRANT) 
   
   
/s/    John P. McLaughlin 
John P. McLaughlin 
President and Chief Executive Officer (Principal Executive Officer) 


/s/    Peter S. Garcia 
Peter S. Garcia 
Vice President and Chief Financial Officer (Principal Financial Officer) 


/s/    Steffen Pietzke 
Steffen Pietzke 
ControllerVice President, Finance and Chief Accounting Officer (Principal Accounting Officer) 




EXHIBIT INDEX
Exhibit NumberExhibit Title
  
10.1*#3.1Restated Certificate of Incorporation effective March 23, 1993 (incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K filed March 31, 1993)
3.2Certificate of Amendment of Certificate of Incorporation effective August 21, 2001 (incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K filed March 14, 2002)
3.3Certificate of Amendment of Certificate of Incorporation effective January 9, 2006 (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed January 10, 2006)
3.4Certificate of Designation, Preferences and Rights of the Terms effective August 25, 2006 (incorporated by reference to Exhibit 3.4 to Registration Statement on Form 8-A filed September 6, 2006)
3.5Third Amended and Restated 2016Bylaws effective December 4, 2014 (incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K filed December 9, 2014)
3.6Certificate of Amendment of Restated Certificate of Incorporation effective May 22, 2013 (incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 filed June 21, 2013)
10.1*#
2017 Annual Bonus Plan
  
10.2*#Amended and Restated 2016/20
2017/21 Long-Term Incentive Plan
10.3#
Third Amendment to Lease Agreement between 932936, LLC and the Company, effective May 27, 2014
  
12.1#
Ratio of Earnings to Fixed Charges
  
31.1#
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
  
31.2#
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
  
32.1**#
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase
101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase
  
#Filed herewith.
*Management contract or compensatory plan or arrangementarrangement.
**This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.


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