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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2010

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





LOGO

PDL BIOPHARMA, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3023969                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)

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  x    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   ̈    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 |  | x                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

As of April 28, 2010, there were 119,674,377 shares of the Registrants Common Stock outstanding.









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PDL BIOPHARMA, INC.

INDEX



|                               |  |                                                                                                    |  |     
|------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                    |  | Page
|PART I - FINANCIAL INFORMATION
|                               |  |                                                                                                   
|ITEM 1.                        |  | FINANCIAL STATEMENTS (UNAUDITED)                                                                   |  | 3   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009     |  | 3   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009                      |  | 4   
|                               |  |                                                                                                   
|                               |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 |  | 5   
|                               |  |                                                                                                   
|                               |  | Notes to the Condensed Consolidated Financial Statements                                           |  | 6   
|                               |  |                                                                                                   
|ITEM 2.                        |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS              |  | 12  
|                               |  |                                                                                                   
|ITEM 3.                        |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                         |  | 22  
|                               |  |                                                                                                   
|ITEM 4.                        |  | CONTROLS AND PROCEDURES                                                                            |  | 23  
|                              
|PART II - OTHER INFORMATION   
|                               |  |                                                                                                   
|ITEM 1.                        |  | LEGAL PROCEEDINGS                                                                                  |  | 23  
|                               |  |                                                                                                   
|ITEM 1A.                       |  | RISK FACTORS                                                                                       |  | 24  
|                               |  |                                                                                                   
|ITEM 6.                        |  | EXHIBITS                                                                                           |  | 30  
|                               | 
|SIGNATURES                     |  | 31                                                                                                

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 are trademarks, registered trademarks or trade names of their respective owners.



2



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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 EndedMarch 31, |        
|                                                           |  | 2010                        |         |   | 2009 |  
|Revenues:                                                  |  |                             |         |   |      |   |         |  
|Royalties                                                  |  | $                           | 62,061  |   |      | $ | 62,298  |  
|License and other                                          |  |                             |        |   |      |   | 324     |  
|                                                           |  |                             |         |   |      |   |         |  
|Total revenues                                             |  |                             | 62,061  |   |      |   | 62,622  |  
|                                                           |  |                            
|General and administrative expenses                        |  |                             | 9,410   |   |      |   | 4,693   |  
|                                                           |  |                             |         |   |      |   |         |  
|Operating income                                           |  |                             | 52,651  |   |      |   | 57,929  |  
|Interest and other income, net                             |  |                             | 80      |   |      |   | 336     |  
|Interest expense                                           |  |                             | (12,527 | ) |      |   | (3,574  | )
|                                                           |  |                             |         |   |      |   |         |  
|Income before income taxes                                 |  |                             | 40,204  |   |      |   | 54,691  |  
|Income tax expense                                         |  |                             | 14,197  |   |      |   | 17,234  |  
|                                                           |  |                             |         |   |      |   |         |  
|Net income                                                 |  | $                           | 26,007  |   |      | $ | 37,457  |  
|                                                           |  |                             |         |   |      |   |         |  
|Net income per basic share                                 |  | $                           | 0.22    |   |      | $ | 0.31    |  
|                                                           |  |                             |         |   |      |   |         |  
|Net income per diluted share                               |  | $                           | 0.15    |   |      | $ | 0.23    |  
|                                                           |  |                             |         |   |      |   |         |  
|Cash dividends declared per common share                   |  | $                           | 1.00    |   |      | $ | 1.00    |  
|                                                           |  |                             |         |   |      |   |         |  
|                                                           |  |                            
|Shares used to compute income per basic and diluted share: |  |                             |         |   |      |   |         |  
|Shares used to compute income per basic share              |  |                             | 119,525 |   |      |   | 119,327 |  
|                                                           |  |                             |         |   |      |   |         |  
|Shares used to compute income per diluted share            |  |                             | 184,308 |   |      |   | 172,570 |  
|                                                           |  |                             |         |   |      |   |         |  

See accompanying notes.



3



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PDL BIOPHARMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)



|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                            |  | March 31,2010 |          |   | December 31,2009 |  
|                                                                                                                                                                            |  | (Unaudited)   |          |   | (Note 1)         |  
|Assets                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                             |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                   |  | $             | 319,674  |   |                  | $ | 303,227  |  
|Receivables from licensees                                                                                                                                                  |  |               | 150      |   |                  |   | 1,050    |  
|Deferred tax assets                                                                                                                                                         |  |               |         |   |                  |   | 1,271    |  
|Prepaid and other current assets                                                                                                                                            |  |               | 14,292   |   |                  |   | 10,288   |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                        |  |               | 334,116  |   |                  |   | 315,836  |  
|                                                                                                                                                                            |  |              
|Property and equipment, net                                                                                                                                                 |  |               | 137      |   |                  |   | 171      |  
|Long-term deferred tax assets                                                                                                                                               |  |               | 8,350    |   |                  |   | 10,396   |  
|Other assets                                                                                                                                                                |  |               | 15,648   |   |                  |   | 12,008   |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                |  | $             | 358,251  |   |                  | $ | 338,411  |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|                                                                                                                                                                            |  |              
|Liabilities and Stockholders Deficit                                                                                                                                       |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                        |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                            |  | $             | 685      |   |                  | $ | 370      |  
|Accrued compensation                                                                                                                                                        |  |               | 1,954    |   |                  |   | 2,206    |  
|Accrued interest                                                                                                                                                            |  |               | 2,567    |   |                  |   | 8,812    |  
|Other accrued liabilities                                                                                                                                                   |  |               | 6,573    |   |                  |   | 2,292    |  
|Deferred revenue                                                                                                                                                            |  |               | 1,500    |   |                  |   | 1,600    |  
|Dividend payable                                                                                                                                                            |  |               | 119,974  |   |                  |   | 386      |  
|Current portion of convertible notes payable                                                                                                                                |  |               | 199,978  |   |                  |   | 199,998  |  
|Current portion of non-recourse notes payable                                                                                                                               |  |               | 84,386   |   |                  |   | 77,852   |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                   |  |               | 417,617  |   |                  |   | 293,516  |  
|                                                                                                                                                                            |  |              
|Convertible notes payable                                                                                                                                                   |  |               | 228,000  |   |                  |   | 228,000  |  
|Non-recourse notes payable                                                                                                                                                  |  |               | 202,993  |   |                  |   | 222,148  |  
|Other long-term liabilities                                                                                                                                                 |  |               | 10,700   |   |                  |   | 10,700   |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                           |  |               | 859,310  |   |                  |   | 754,364  |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Commitments and contingencies (Note 12)                                                                                                                                     |  |               |          |   |                  |   |          |  
|Stockholders deficit:                                                                                                                                                      |  |               |          |   |                  |   |          |  
|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, 250,000 shares authorized; 119,526 and 119,523 shares issued and outstanding at
March 31, 2010 and December 31, 2009, respectively |  |               | 1,195    |   |                  |   | 1,195    |  
|Additional paid-in capital                                                                                                                                                  |  |               | (201,325 | ) |                  |   | (83,850  | )
|Accumulated deficit                                                                                                                                                         |  |               | (307,291 | ) |                  |   | (333,298 | )
|Accumulated other comprehensive income                                                                                                                                      |  |               | 6,362    |   |                  |   |         |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Total stockholders deficit                                                                                                                                                 |  |               | (501,059 | ) |                  |   | (415,953 | )
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders deficit                                                                                                                                 |  | $             | 358,251  |   |                  | $ | 338,411  |  
|                                                                                                                                                                            |  |               |          |   |                  |   |          |  

See accompanying notes.



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PDL BIOPHARMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                  |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months Ended March 31, |        
|                                                                                  |  | 2010                         |         |   | 2009 |  
|Cash flows from operating activities                                              |  |                              |         |   |      |   |         |  
|Net income                                                                        |  | $                            | 26,007  |   |      | $ | 37,457  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |         |   |      |   |         |  
|Depreciation expense                                                              |  |                              | 34      |   |      |   | 887     |  
|Amortization of convertible notes offering costs                                  |  |                              | 501     |   |      |   | 585     |  
|Amortization of non-recourse notes offering costs                                 |  |                              | 1,881   |   |      |   |        |  
|Stock-based compensation expense                                                  |  |                              | 188     |   |      |   | 196     |  
|Tax benefit from stock-based compensation arrangements                            |  |                              | 1,989   |   |      |   | 12,792  |  
|Net excess tax benefit from stock-based compensation                              |  |                              | (2,217  | ) |      |   | (18,056 | )
|Deferred income taxes                                                             |  |                              | 277     |   |      |   | 3,623   |  
|Changes in assets and liabilities:                                                |  |                              |         |   |      |   |         |  
|Receivables from licensees                                                        |  |                              | 900     |   |      |   | 12,876  |  
|Prepaid and other current assets                                                  |  |                              | (285    | ) |      |   | (33     | )
|Other assets                                                                      |  |                              | 47      |   |      |   |        |  
|Accounts payable                                                                  |  |                              | 315     |   |      |   | (2,431  | )
|Accrued liabilities                                                               |  |                              | (2,601  | ) |      |   | (20,083 | )
|Deferred revenue                                                                  |  |                              | (100    | ) |      |   | (100    | )
|                                                                                  |  |                              |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                              | 26,936  |   |      |   | 27,713  |  
|                                                                                  |  |                              |         |   |      |   |         |  
|Cash flows from investing activities                                              |  |                              |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                              |        |   |      |   | (33     | )
|                                                                                  |  |                              |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                              |        |   |      |   | (33     | )
|                                                                                  |  |                              |         |   |      |   |         |  
|Cash flows from financing activities                                              |  |                              |         |   |      |   |         |  
|Proceeds from issuance of common stock, net of cancellations                      |  |                              |        |   |      |   | 256     |  
|Payments for debt issuance costs                                                  |  |                              |        |   |      |   | (327    | )
|Repayment of non-recourse notes                                                   |  |                              | (12,621 | ) |      |   |        |  
|Cash dividend paid                                                                |  |                              | (85     | ) |      |   |        |  
|Net excess tax benefit from stock-based compensation                              |  |                              | 2,217   |   |      |   | 18,056  |  
|                                                                                  |  |                              |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                               |  |                              | (10,489 | ) |      |   | 17,985  |  
|                                                                                  |  |                              |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                         |  |                              | 16,447  |   |      |   | 45,665  |  
|Cash and cash equivalents at beginning of the period                              |  |                              | 303,227 |   |      |   | 129,058 |  
|                                                                                  |  |                              |         |   |      |   |         |  
|Cash and cash equivalents at end of the period                                    |  | $                            | 319,674 |   |      | $ | 174,723 |  
|                                                                                  |  |                              |         |   |      |   |         |  

See accompanying notes.



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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

(Unaudited)

1.
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information. The financial statements include all adjustments consisting only of normal recurring adjustments that the management of PDL BioPharma, Inc. (PDL, we or our) 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 Condensed Consolidated Financial Statements and related financial information should be read in conjunction with the audited
Consolidated Financial Statements and the related notes thereto for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC). The Condensed Consolidated Balance
Sheet at December 31, 2009 has been derived from the audited Consolidated Financial Statements at that date.

Principles of Consolidation

Beginning in November 2009, the Consolidated Financial Statements include the accounts of PDL and its wholly-owned subsidiary, QHP Royalty Sub LLC (QHP).
For the period from January to November 2009, we had no wholly owned subsidiaries. All intercompany transactions are eliminated in consolidation.



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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

March 31, 2010

(Unaudited)



Foreign Currency Hedging Contracts

We hedge certain foreign currency exposures related to our licensees product sales with foreign currency exchange forward contracts and foreign
currency exchange option contracts. In general, these contracts are intended to offset the underlying foreign currency market risk in our royalty revenues. Our exposure to credit risk from these contracts is a function of currency exchange rates
and, therefore, varies over time. We limit the credit risk that our counterparty to these contracts may be unable to perform by transacting with a major bank, and for which we monitor the exposure in the context of current market conditions. We
mitigated the risk of loss by entering into a netting agreement with our counterparty that provides for net settlement should our counterparty default on the forward and options contracts prior to maturity. Therefore, our overall risk of loss in the
event of counterparty default is limited to the amount of any unrecognized gains on outstanding contracts net of any unrecognized losses on outstanding contracts at the date of default. We do not enter into speculative foreign currency transactions.
We have designated the foreign currency contracts as cash flow hedges. At the inception of the hedging relationship and on a quarterly basis, we assess hedge effectiveness. The aggregate unrealized gain or loss on the effective component of our
foreign currency exchange contracts net of estimated taxes is recorded in stockholders deficit as accumulated other comprehensive income. Gains or losses on cash flow hedges are recognized as license and other revenue in the same period that
the hedged transaction (royalty revenue) impacts earnings.

Customer Concentration

The following table summarizes revenues from our licensees products which individually accounted for 10% or more of our total revenues for the three
months ended March 31, 2010 and 2009:



|                              |  |              |  |                             |  |     
|----------------------------- |  | ------------ |  | --------------------------- |  | ----
|                              |  |              |  | Three Months EndedMarch 31,
|Licensees                     |  | Product Name |  | 2010                        |  | 2009
|Genentech, Inc. (Genentech)   |  | Avastin®     |  | 27%                         |  | 22% 
|                              |  | Herceptin®   |  | 38%                         |  | 26% 
|                              |  | Lucentis®    |  | 12%                         |  | 7%  
|                              |  |              | 
|MedImmune, LLC
(MedImmune)(1) |  | Synagis®     |  |                            |  | 27% 
|                              |  |              | 
|Elan Corporation, Plc (Elan)  |  | Tysabri®     |  | 14%                         |  | 11% 



|(1) | In December 2009, we sent a letter to MedImmune stating that it is in breach of its obligations under the license agreement, canceling the license agreement and
revoking any licenses and rights granted therein. In February 2010, MedImmune made a royalty payment to an escrow account created pendente lite (while the litigation is pending). We do not expect to receive additional payments from MedImmune
unless and until the lawsuit is resolved in our favor.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. Stock-Based Compensation

Stock-based compensation expense for employees and directors for the three months ended March 31, 2010 and 2009 was as follows:



|                                                        |  |                              |     |   |      |   |     |  
|------------------------------------------------------- |  | ---------------------------- | --- | - | ---- | - | --- | -
|                                                        |  | Three Months EndedMarch 
31, |    
|(In thousands)                                          |  | 2010                         |     |   | 2009 |  
|General and administrative expenses                     |  | $                            | 188 |   |      | $ | 184 |  
|Income tax effect                                       |  |                              | (66 | ) |      |   | (64 | )
|                                                        |  |                              |     |   |      |   |     |  
|Stock-based compensation expense included in net income |  | $                            | 122 |   |      | $ | 120 |  
|                                                        |  |                              |     |   |      |   |     |  

During the three months ended March 31, 2010, approximately 1.3 million of fully vested stock options with an
average exercise price of $20.36 were forfeited and expired unexercised.

3. Net Income per Share

We compute basic net income per share using the weighted-average number of shares of common stock outstanding during the periods presented less the
weighted-average number of shares of restricted stock that are subject to repurchase. We compute diluted net income per share using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares
used in the computation of diluted net income per share result from the assumed exercise of stock options, the issuance of restricted stock and the assumed conversion of our 2.00% Convertible Senior Notes (the 2012 Notes) and our 2.75% Convertible
Subordinated Notes (the 2023 Notes), including both the effect of adding back interest expense and the inclusion of the underlying shares using the if-converted method. The adjusted conversion rate for the 2012 Notes is 128.318 shares per $1,000
principal amount



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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

March 31, 2010

(Unaudited)



of 2012 Notes, or a conversion price of approximately $7.79 per share, effective March 16, 2010. The adjusted conversion rate for the 2023 Notes is 177.1594 shares per $1,000 principal
amount of 2023 Notes, or a conversion price of approximately $5.64 per share, effective March 16, 2010. Following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the three
months ended March 31, 2010 and 2009:



|                                                                                                                                                                                      |  |                              |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | ---- | - | -------
|                                                                                                                                                                                      |  | Three Months Ended March 31,
|(In thousands)                                                                                                                                                                        |  | 2010                         |         | 2009
|Numerator                                                                                                                                                                             |  |                              |         |      |   |        
|Net income                                                                                                                                                                            |  | $                            | 26,007  |      | $ | 37,457 
|Add back interest expense for convertible notes, net of estimated tax of $0.9 million and $1.0 million for the three months ended
March 31, 2010 and 2009, respectively (see Note 10) |  |                              | 1,635   |      |   | 1,930  
|                                                                                                                                                                                      |  |                              |         |      |   |        
|Income used to compute income per diluted share                                                                                                                                       |  | $                            | 27,642  |      | $ | 39,387 
|                                                                                                                                                                                      |  |                              |         |      |   |        
|                                                                                                                                                                                      |  |                             
|Denominator                                                                                                                                                                           |  |                              |         |      |   |        
|Total weighted-average shares used to compute basic income per share                                                                                                                  |  |                              | 119,525 |      |   | 119,327
|Effect of dilutive stock options                                                                                                                                                      |  |                              | 9       |      |   | 15     
|Restricted stock outstanding                                                                                                                                                          |  |                              | 89      |      |   | 8      
|Assumed conversion of 2012 Notes                                                                                                                                                      |  |                              | 29,256  |      |   | 22,291 
|Assumed conversion of 2023 Notes                                                                                                                                                      |  |                              | 35,429  |      |   | 30,929 
|                                                                                                                                                                                      |  |                              |         |      |   |        
|Shares used to compute income per diluted share                                                                                                                                       |  |                              | 184,308 |      |   | 172,570
|                                                                                                                                                                                      |  |                              |         |      |   |        

We have excluded 0.7 million and 5.0 million of outstanding
stock options from our diluted earnings per share calculations for the three months ended March 31, 2010 and 2009, respectively, because the options exercise prices were greater than the average market prices of our common stock during
these periods; therefore, their effect was antidilutive.

4. Fair Value Measurements

The fair value of our financial instruments are estimates of the amounts that would be received if we were to sell an asset or we paid to transfer a
liability in an orderly transaction between market participants at the measurement date (exit price). We apply a three-level valuation hierarchy for fair value measurements. The categorization of assets and liabilities within the valuation hierarchy
is based upon the lowest level of input that is significant to the measurement of fair value. Level 1 inputs to the valuation method use unadjusted quoted market prices in active markets for identical assets and liabilities. Level 2 inputs to the
valuation method are other observable inputs, including quoted market prices for similar assets and liabilities, quoted prices for identical and similar assets and liabilities in the markets that are not active, or other inputs that are observable
or can be corroborated by observable market data. Level 3 inputs to the valuation method are unobservable inputs based upon managements best estimate of the inputs that market participants would use in pricing the asset or liability at the
measurement date, including assumptions about risk. We do not estimate the fair value of our royalty assets.

The following table summarizes,
for assets or liabilities recorded at fair value, the respective fair value and classification by level of input with the fair value hierarchy defined above:



|                                 |  |                |         |                   |   |       |  |         |         |         |   |         |  |   |   |  |   |        
|-------------------------------- |  | -------------- | ------- | ----------------- | - | ----- |  | ------- | ------- | ------- | - | ------- |  | - | - |  | - | -------
|                                 |  | March 31, 2010 |         | December 31, 2009
|(In thousands)                   |  | Level 1        |         | Level 2           |   | Total |  | Level 1 |         | Level 2 |   | Total  
|Assets:                          |  |                |         |                   |   |       |  |         |         |         |   |         |  |   |   |  |   |        
|Money market funds               |  | $              | 253,278 |                   | $ |      |  | $       | 253,278 |         | $ | 296,969 |  | $ |  |  | $ | 296,969
|Foreign currency hedge contracts |  |                |        |                   |   | 9,788 |  |         | 9,788   |         |   |        |  |   |  |  |   |       
|                                 |  |                |         |                   |   |       |  |         |         |         |   |         |  |   |   |  |   |        
|Total                            |  | $              | 253,278 |                   | $ | 9,788 |  | $       | 263,066 |         | $ | 296,969 |  | $ |  |  | $ | 296,969
|                                 |  |                |         |                   |   |       |  |         |         |         |   |         |  |   |   |  |   |        

The fair value of the foreign currency hedging
contracts is estimated based on pricing models using readily observable inputs from actively quoted markets.

5. Cash Equivalents and
Investments

As of March 31, 2010 and December 31, 2009, we had invested in money market funds. Our securities are classified as
available-for-sale and are carried at estimated fair value, with unrealized gains and losses, if any, reported in stockholders deficit as accumulated other comprehensive income. The estimated fair value is based upon quoted market prices. The
cost of securities sold is based on the specific identification method. To date, we have not experienced credit losses on investments in these instruments and we do not require collateral for our investment activities. During the three months ended
March 31, 2010 and the year ended December 31, 2009, we did not recognize any gains or losses on sales of available-for-sale securities.



8



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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

March 31, 2010

(Unaudited)



6. Foreign Currency Hedging Contracts

Our licensees operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations between the
U.S. dollar and other currencies, primarily the eurodollar. In order to manage the risk related to changes in foreign currency exchange rates, in January 2010, we entered into a series of foreign currency exchange forward contracts and foreign
currency exchange option contracts (collectively, foreign currency exchange contracts) covering the eight quarters in which our licensees sales occur for the two years ended December 2011. Our foreign currency exchange contracts used to hedge
royalty revenues are designated as cash flow hedges.

The following table summarizes the notional amounts, currency exchange rates and fair
values of our open foreign currency exchange forward and option contracts designated as cash flow hedges at March 31, 2010:



|                                            |  |                               |         |                                    |      |                          |   |       |  |                      
|------------------------------------------- |  | ----------------------------- | ------- | ---------------------------------- | ---- | ------------------------ | - | ----- |  | ---------------------
|Foreign Currency Exchange Forward Contracts |  |                               |         |                                    |     
|                                            |  |                               |         |                                   
|Currency                                    |  | Notional Amount(In thousands) |         | Settlement Price($ per eurodollar) |      | Fair Value(In thousands) |   | Type 
|Eurodollar                                  |  | $                             | 217,819 |                                    | 1.40 |                          | $ | 7,720 |  | Sell eurodollar      
|                                            |  |                              
|Foreign Currency Exchange Option Contracts  |  |                               |         |                                    |     
|                                            |  |                               |         |                                   
|Currency                                    |  | Notional Amount(In thousands) |         | Strike
Price($ per eurodollar)     |      | Fair Value(In
thousands) |   | Type 
|Eurodollar                                  |  | $                             | 234,934 |                                    | 1.51 |                          | $ | 2,068 |  | Purchased call option

As of March 31,
2010, the fair value of our foreign currency hedging contracts totaled $9.8 million of which $4.1 million was included in other current assets and $5.7 million was included other non-current assets. The foreign currency contracts are presented on a
net basis on our Balance Sheets as we have entered into a netting arrangement with the counterparty. As of March, 31, 2010, the unrealized gain on the effective component of our foreign currency contracts included in other comprehensive income, net
of estimated taxes, was $6.4 million. There was no ineffective component of our foreign currency hedge contracts during the three months ended March 31, 2010. Approximately $2.7 million is expected to be reclassified from other comprehensive
income to earnings in the next 12 months. We did not have foreign currency hedging contracts prior to January 2010.

7. Prepaid and Other
Current Assets

Prepaid and other current assets as of March 31, 2010 and December 31, 2009 consisted of the following:



|                                       |  |                 |        |                  |   |       
|-------------------------------------- |  | --------------- | ------ | ---------------- | - | ------
|(In thousands)                         |  | March 31,  2010 |        | December 31,2009
|Non-recourse Notes issuance costs      |  | $               | 3,264  |                  | $ | 3,373 
|2023 Notes issuance costs              |  |                 | 282    |                  |   | 524   
|Foreign currency hedge                 |  |                 | 4,082  |                  |   |      
|Prepaid taxes                          |  |                 | 5,679  |                  |   | 5,847 
|Other                                  |  |                 | 985    |                  |   | 544   
|                                       |  |                 |        |                  |   |       
|Total prepaid and other current assets |  | $               | 14,292 |                  | $ | 10,288
|                                       |  |                 |        |                  |   |       



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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

March 31, 2010

(Unaudited)



8. Other Assets

Other assets as of March 31, 2010 and December 31, 2009 consisted of the following:



|                                  |  |                 |        |                  |   |       
|--------------------------------- |  | --------------- | ------ | ---------------- | - | ------
|(In thousands)                    |  | March 31,  2010 |        | December 31,2009
|Non-recourse Notes issuance costs |  | $               | 7,852  |                  | $ | 9,624 
|2012 Notes issuance costs         |  |                 | 1,943  |                  |   | 2,202 
|Foreign currency hedge            |  |                 | 5,706  |                  |   |      
|Other                             |  |                 | 147    |                  |   | 182   
|                                  |  |                 |        |                  |   |       
|Total other assets                |  | $               | 15,648 |                  | $ | 12,008
|                                  |  |                 |        |                  |   |       

9. Other Accrued Liabilities

Other accrued liabilities as of March 31, 2010 and December 31, 2009 consisted of the following:



|                                |  |                 |       |                  |   |      
|------------------------------- |  | --------------- | ----- | ---------------- | - | -----
|(In thousands)                  |  | March 31,  2010 |       | December 31,2009
|Consulting and services         |  | $               | 3,885 |                  | $ | 2,154
|Accrued income taxes            |  |                 | 2,177 |                  |   | 81   
|Deferred tax liability          |  |                 | 386   |                  |   |     
|Other                           |  |                 | 125   |                  |   | 57   
|                                |  |                 |       |                  |   |      
|Total other accrued liabilities |  | $               | 6,573 |                  | $ | 2,292
|                                |  |                 |       |                  |   |      

10. Convertible and Non-Recourse Notes

The following table summarizes our convertible and non-recourse notes activity for the quarter, as well as the balances and fair values at March 31,
2010:



|                              |  |           |         |           |   |         |                   |  |   |         |   |  |   |         |  
|----------------------------- |  | --------- | ------- | --------- | - | ------- | ----------------- |  | - | ------- | - |  | - | ------- | -
|(In thousands)                |  | 2012Notes |         | 2023Notes |   |         | Non-RecourseNotes |  |   | Total   |  
|Balance at December 31, 2009  |  | $         | 228,000 |           | $ | 199,998 |                   |  | $ | 300,000 |   |  | $ | 727,998 |  
|Payments                      |  |           |        |           |   |        |                   |  |   | (12,621 | ) |  |   | (12,621 | )
|Conversion to common
stock(1) |  |           |        |           |   | (20     | )                 |  |   |        |   |  |   | (20     | )
|                              |  |           |         |           |   |         |                   |  |   |         |   |  |   |         |  
|Balance at March 31, 2010     |  | $         | 228,000 |           | $ | 199,978 |                   |  | $ | 287,379 |   |  | $ | 715,357 |  
|                              |  |           |         |           |   |         |                   |  |   |         |   |  |   |         |  
|Fair
value(2)                 |  | $         | 220,385 |           | $ | 227,515 |                   |  | $ | 287,379 |   |  | $ | 735,279 |  
|                              |  |           |         |           |   |         |                   |  |   |         |   |  |   |         |  



|(1) | During the three months ended March 31, 2010, certain holders of the 2023 Notes converted $20,000 into 3,294 shares of common stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(2) | As of March 31, 2010, the fair value of the remaining payments under our convertible notes was estimated based on the trading value of our notes. As of
March 31, 2010, the fair value of our QHP Notes was estimated to be the carrying value of the notes because management believes that the QHP Notes terms and conditions approximate current market rates.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11. Comprehensive Income

Comprehensive
income comprises net income adjusted for other comprehensive income which includes the changes in unrealized gains and losses on our foreign currency hedges, which are excluded from net income.

The following table presents the calculation of our comprehensive income:



|                                                                     |  |                              |        |      |   |       
|-------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                                                     |  | Three Months Ended March 31,
|(In thousands)                                                       |  | 2010                         |        | 2009
|Net income                                                           |  | $                            | 26,007 |      | $ | 37,457
|Other comprehensive income:                                          |  |                              |        |      |   |       
|Unrealized gain on foreign currency exchange contracts, net of taxes |  |                              | 6,362  |      |   |      
|                                                                     |  |                              |        |      |   |       
|Total comprehensive income                                           |  | $                            | 32,369 |      | $ | 37,457
|                                                                     |  |                              |        |      |   |       



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PDL BIOPHARMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

March 31, 2010

(Unaudited)



12. Commitments and Contingencies

Lease Guarantee

In connection with the divestiture of our former biotechnology subsidiary, Facet Biotech Corporation (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
divestiture. Should Facet default under its lease obligations, we would 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, 2010, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately $128.4 million. We would 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 if Facet were to default. We have recorded a liability of $10.7 million on our Balance Sheets as of March 31, 2010 and December 31, 2009 related to the estimated fair value
of this guarantee. In April 2010, Abbott Laboratories announced that it had successfully completed a tender offer by its wholly-owned subsidiary, Amber Acquisition Inc., to purchase all of the outstanding shares of common stock of Facet. This
acquisition could reduce the probability of Facets default on the Redwood City leases and the probability that PDL will have to make payments with respect to the lease guarantee.

Pierre Fabre - Sales Rebate

Until PDLs assignment and sale of a pharmaceutical product,
Busulfex®, to Otsuka Pharmaceuticals (Otsuka) in March 2008, Pierre Fabre Medicament (Pierre Fabre) was
PDLs exclusive distributor for Busulfex in Italy. In 2005, Pierre Fabre negotiated a pricing and sales volume agreement with the Agenzia Italiana del Farmaco (AIFA) related to its distribution of Busulfex in which Pierre Fabre agreed to a
maximum amount of ex-factory sales of Busulfex in Italy. During 2006 and 2007, Pierre Fabre exceeded those sales limits and, in October 2008, Pierre Fabre received notification to repay EUR 2.13 million to the local Italian authorities for
such excess sales. Pierre Fabre sent a letter to Otsuka requesting that it pay 40% of the total amount paid by Pierre Fabre. This letter was, in turn, forwarded to PDLs attention and the Company responded to Pierre Fabre declining to make
payment as there is no basis for reimbursement under PDLs contractual arrangement with Pierre Fabre. The Parties have exchanged further communication; however, PDL does not believe that any reimbursement is required under the contract or
that it is probable that PDL will need to reimburse Pierre Fabre. As of March 31, 2010, no amounts for this contingency have been accrued.

13. Income Taxes

Income tax expense for
the three months ended March 31, 2010 and 2009 was $14.2 million and $17.2 million, respectively, which resulted primarily from applying the federal statutory income tax rate of 35% to income from operations. Following the relocation of our
principal place of business to Incline Village, Nevada in December 2008, we have no continuing operations in California. Nevada does not impose an income tax and, accordingly, we no longer have any ongoing material state income tax expense.

14. Cash Dividends

On
January 27, 2010, our board of directors declared two special cash dividends of $0.50 per share payable on April 1, 2010 and October 1, 2010 to stockholders of record on March 15, 2010 and September 15, 2010, respectively.
As of March 31, 2010, we accrued $120.0 million in dividends payable for the April and October 2010 dividend payments. Using cash on hand and proceeds from our first quarter 2010 earnings, we paid $59.8 million to our stockholders on
April 1, 2010.

Effective March 16, 2010, in connection with the payment of the dividend in April 2010, the conversion ratios for
our outstanding 2012 Notes was adjusted to 128.318 shares per $1,000 principal amount of 2012 Notes, or a conversion price of approximately $7.79 per share, and the conversion rate for the 2023 Notes was adjusted to 177.1594 shares per $1,000
principal amount of 2023 Notes, or a conversion price of approximately $5.64 per share.

15. Subsequent Event

During April 2010, we repurchased an aggregate of $77.2 million face value of our 2023 Notes, at a premium of 19% to face value in privately negotiated
transactions with institutional holders, for aggregate consideration of $92.1 million in cash, plus accrued but unpaid interest.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Quarterly Report 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. 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. Although we believe that the
expectations presented in the forward-looking statements contained herein are reasonable, 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 the forward-looking statements. 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, and for the reasons described elsewhere in this Quarterly Report. All forward-looking statements and reasons why results may differ included in this Quarterly Report are made as of the date hereof, and we assume no
obligation to update these forward-looking statements or reasons why actual results might differ.

OVERVIEW

Our business is the management of antibody humanization patents and royalty assets which consist of our Queen et al. patents and our license agreements
with numerous biotechnology and pharmaceutical companies pursuant to which we have licensed certain rights under our Queen et al. patents. We receive royalties based on sales of humanized antibody products marketed today and may also receive royalty
payments on additional humanized antibody products launched before final patent expiry in December 2014. Under most of our licensing agreements, we are entitled to receive a flat-rate or tiered royalty based upon our licensees net sales of
covered antibodies.

We continuously evaluate alternatives to increase return for our stockholders, for example, purchasing royalty generating
assets, buying back our convertible notes, repurchasing our common stock, selling the company or paying dividends. On January 27, 2010, our board of directors declared two special cash dividends of $0.50 per share payable on April 1, 2010
and October 1, 2010. As of March 31, 2010, we accrued $120.0 million in dividends payable for the April and October dividend payments. Using proceeds from our first quarter 2010 earnings and cash on hand and based on the total shares
outstanding as of the March 15, 2010 record date, we paid $59.8 million to our stockholders on April 1, 2010. The record date for the October 1, 2010 dividend is September 15, 2010.

Recent Developments

Effective March 16, 2010, in connection with the payment of the dividend in April 2010, the conversion ratios for our outstanding 2012 Notes and 2023
Notes were adjusted to 128.318 and 177.1594 shares of common stock per $1,000 principal amount of each of the notes, respectively. The adjustment was based on the amount of the dividend and the trading price of our stock in certain periods pursuant
to the terms of the applicable indenture. The conversion ratios for each of the notes will be further adjusted on September 16, 2010 in connection with the October 2010 dividend payment.

On February 22, 2010, the court issued an order construing the claim language at issue in the MedImmune litigation. The court generally construed
the claim language at issue as proposed by PDL. In March of 2010, the court issued orders denying MedImmunes requests for a preliminary injunction against our cancellation of the license agreement, to strike our breach of contract counter
claims, and for summary judgment that MedImmune is entitled under the most favored licensee clause in our agreement to a fully paid-up license as of December 2008 as a result of our agreement with Alexion and, retroactively to 1998, to a reduced
royalty rate on sales of Synagis. A jury trial is scheduled to begin on January 25, 2011. For further details, see Part II Item l  Legal Proceedings.

Patents and Technology Outlicense Agreements

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 is in December 2014, cover, among other things,
humanized antibodies, methods for humanizing antibodies, polynucleotide encoding in humanized antibodies and methods of producing humanized antibodies.



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##### Table of Contents

The following is a list of our U.S. patents within our Queen et al. patent portfolio:



|                   |  |             |  |               |  |           
|------------------ |  | ----------- |  | ------------- |  | ----------
|Application Number |  | Filing Date |  | Patent Number |  | Issue Date
|08/477,728         |  | 06/07/95    |  | 5,585,089     |  | 12/17/96  
|08/474,040         |  | 06/07/95    |  | 5,693,761     |  | 12/02/97  
|08/487,200         |  | 06/07/95    |  | 5,693,762     |  | 12/02/97  
|08/484,537         |  | 06/07/95    |  | 6,180,370     |  | 01/30/01  

Our European
Patent No. 0 451 216B (the 216 Patent) expired in December 2009. We have applied for and been granted Supplemental Protection Certificates (SPCs) with respect to the
Herceptin®,
Synagis®,
Xolair®,
Avastin®,
Tysabri®,
Lucentis® and
Cimzia® products in many of the jurisdictions in the European Union in connection with the 216 Patent.
These SPCs effectively extend our patent protection with respect to these products generally until December 2014, except that the SPCs for Herceptin and Synagis will generally expire in July 2014 and August 2014, respectively. Because SPCs are
granted on a jurisdiction-by-jurisdiction basis, the duration of the extension varies slightly in certain jurisdictions. We are not able to file applications for any SPCs after December 2009. Therefore, if a product is first approved for marketing
after December 2009 in a jurisdiction that issues SPCs, we will not have patent protection or SPC protection in this jurisdiction with respect to this product. We may still be eligible for royalties notwithstanding the unavailability of SPC
protection if the relevant royalty-bearing humanized antibody product is also made, used, sold or offered for sale in or imported from a jurisdiction in which we have an unexpired Queen et al. patent such as the United States.

We are currently in an opposition proceeding with respect to the 216 Patent at the European Patent Office. MedImmune filed a declaratory judgment
against us related to the Queen et al. patents in December 2008. In February 2009, the U.S. Patent and Trademark Office (PTO) declared an interference proceeding between our U.S. Patent No. 5,585,089 (the 089 Patent) and a patent
application pending to Adair et al. and, on November 23, 2009, the PTO declared a second interference proceeding between certain claims of the U.S. Patent No. 6,180,370 (the 370 Patent) and certain pending claims of Adair et al. UCB
Pharma S.A. is the assignee of the Adair et al. applications. For further information, see Part II. Other Information, Item 1, Legal Proceedings.

Licensing Agreements

We
have entered into licensing agreements with numerous entities that are independently developing or have developed humanized antibodies pursuant to which we have licensed certain rights under our Queen et al. patents to make, use, sell, offer for
sale and import humanized antibodies. We receive royalties on net sales of products that are made, used or sold prior to patent expiry. In general, these agreements cover antibodies targeting antigens specified in the license agreements. Under most
of our licensing agreements, we are entitled to receive a flat-rate or tiered royalty based upon our licensees net sales of covered antibodies. Our licensing agreements generally entitle us to royalties following the expiration of our patents
with respect to products manufactured prior to patent expiry. We also expect to receive minimal annual maintenance fees from licensees of our Queen et al. patents.

Licensing Agreements for Marketed Products

In the three months ended March 31, 2010, we received royalties on sales of the seven humanized antibody products listed below,
all of which are currently approved for use by the U.S. Food and Drug Administration (FDA) and other regulatory agencies outside the United States. In 2009, we also received royalties on sales of
Raptiva®, which was marketed by Genentech in the United States and Merck Serono S.A. outside of the United
States, for which approval was suspended in the European Union and Canada in February 2009 and the product was withdrawn from the United States market in April 2009 due to safety concerns. Also, in December 2009, we declared MedImmune in breach of
its license agreement with us and canceled their license agreement pursuant to which they had distributed
Synagis®. For the three months ended March 31, 2009, we received $0.5 million and $17.1 million in
royalties for sales of Raptiva and Synagis, respectively. For more information about MedImmune, see Part II. Other Information, Item 1, Legal Proceedings.

In the three months ended March 31, 2010 and 2009, we received approximately $62.1 million and $62.3 million, respectively, of royalty revenues
under the license agreements. The licensees as of March 31, 2010 with commercial products are identified below:



|                            |  |              
|--------------------------- |  | -------------
|Licensees                   |  | Product Names
|                            | 
|Genentech, Inc. (Genentech) |  | Avastin®     
|                            | 
|                            |  | Herceptin®   
|                            | 
|                            |  | Xolair®      
|                            | 
|                            |  | Lucentis®    



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##### Table of Contents

|                                         |  |                      
|---------------------------------------- |  | ---------------------
|Licensees                                |  | Product Names        
|                                         | 
|Elan Corporation, Plc (Elan)             |  | Tysabri®             
|                                         | 
|Wyeth Pharmaceuticals, Inc. (Wyeth)      |  | Mylotarg®            
|                                         | 
|Chugai Pharmaceutical Co., Ltd. (Chugai) |  | Actemra® 
/RoActemra®

Genentech

We entered
into a master patent license agreement, effective September 25, 1998, pursuant to which we granted Genentech a license under our Queen et al. patents to make, use and sell certain antibody products. Our master patent license agreement with
Genentech provides for a tiered royalty structure under which the royalty rate Genentech must pay on royalty-bearing products sold in the United States or manufactured in the United States and used or sold anywhere in the world (U.S.-based Sales) in
a given calendar year decreases on incremental U.S.-based Sales above certain net sales thresholds. The net sales thresholds and the applicable royalty rates are outlined below:



|                                                |  |             
|----------------------------------------------- |  | ------------
|Aggregate Net Sales                             |  | Royalty Rate
|Net sales up to $1.5 billion                    |  | 3.0%        
|Net sales between $1.5 billion and $2.5 billion |  | 2.5%        
|Net sales between $2.5 billion and $4.0 billion |  | 2.0%        
|Net sales exceeding $4.0 billion                |  | 1.0%        

As a result of the tiered royalty
structure, Genentechs average annual royalty rate for a given year will decline as Genentechs U.S.-based Sales increase during that year. Because we receive royalties one quarter in arrears, the average royalty rates for the payments we
receive from Genentech in the second calendar quarter for Genentechs sales from the first calendar quarter have been and are expected to continue to be higher than the average royalty rates for following quarters. The average royalty rates for
payments we receive from Genentech are generally lowest in the fourth and first calendar quarters for Genentechs sales from the third and fourth calendar quarters when Genentechs U.S.-based Sales bear royalties at the lowest royalty
rates.

With respect to royalty-bearing products that are both manufactured and sold outside of the United States (ex-U.S.-based Manufacturing
and Sales), the royalty rate that we receive from Genentech is a fixed rate of 3.0% based on a percentage of the underlying ex-U.S.-based Manufacturing and Sales. The mix of U.S.-based Sales and ex-U.S.-based Manufacturing and Sales has fluctuated
in the past and may continue to fluctuate in future periods, particularly in light of the 2009 acquisition of Genentech by the Roche Group (Roche).

The mix of U.S.-based sales and ex-U.S. based Manufacturing and Sales is outlined in the following table:



|                                      |  |                             |  |     
|------------------------------------- |  | --------------------------- |  | ----
|                                      |  | Three Months EndedMarch 31,
|                                      |  | 2010                        |  | 2009
|U.S. Based Sales                      |  | 81%                         |  | 93% 
|Ex-U.S. Based Manufacturing and Sales |  | 19%                         |  | 7%  

The information in the
table above is based on information provided to us by Genentech. We were not provided the reasons for the shift in the manufacturing split between U.S.-based Sales and ex-U.S.-based Manufacturing and Sales.

In the first quarter of 2010, PDL received royalties generated from three of Genentechs licensed products; Herceptin, Avastin and Xolair that were
ex-U.S.-based manufactured and sold. Prior to the first quarter of 2010, only Herceptin and Xolair generated royalties from ex-U.S.-based Manufacturing and Sales. Roche has also announced that there are new plants in Singapore for the production of
Avastin and Lucentis. The agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated (i) by Genentech prior to such expiration upon sixty days written notice, (ii) by either party upon
a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events.

Elan

We entered into a patent license agreement, effective April 24, 1998, pursuant to which we granted to Elan a license under our Queen et
al. patents to make, use and sell antibodies that bind to the cellular adhesion molecule a4 in patients with multiple sclerosis. Pursuant to 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. The agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated (i) by Elan prior to such expiration upon
sixty days written notice, (ii) by either party upon a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events.



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##### Table of Contents

Wyeth

We entered into a patent license agreement, effective September 1, 1999, pursuant to which we granted to them a license under our Queen et al.
patents to make, use and sell antibodies that bind to CD33, an antigen that is found in about 80% of patients with acute myeloid leukemia, and conjugated to a cytotoxic agent. Pursuant to the agreement, we are entitled to receive a flat royalty rate
in the low single digits based on Wyeths net sales of the Mylotarg product. The agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated (i) by Wyeth prior to such expiration
upon sixty days written notice, (ii) by either party upon a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events.

Chugai

We entered into
a patent license agreement, effective May 18, 2000, with Chugai, a majority owned subsidiary of Roche, pursuant to which we granted to Chugai a license under our Queen et al. patents to make, use and sell antibodies that bind to interleukin-6
receptor to prevent inflammatory cascades involving multiple cell types for the treatment of rheumatoid arthritis. Pursuant to the agreement, we are entitled to receive a flat royalty rate in the low single digits based on net sales of the
Actemra product (RoActemra in Europe). The agreement continues until the expiration of the last to expire of our Queen et al. patents but may be terminated (i) by Chugai prior to such expiration upon sixty days written notice, (ii) by
either party upon a material breach by the other party or (iii) upon the occurrence of certain bankruptcy-related events.

Other

Pursuant to the terms of our Cross License Agreement with Facet Biotech Corporation (Facet), our former subsidiary that we divested in
December 2008, Facet is obligated to pay us a portion of royalties it receives from Roche on sales of the
Zenapax® product under an agreement with Roche which was assigned to Facet in connection with the divestiture.
Roche is obligated to pay Facet royalties only once product sales have reached a certain threshold. We have not received royalties on sales of Zenapax since the first quarter of 2006 and we do not expect to receive royalty revenue from Roches
sales of Zenapax in the future.

Licensing Agreements Relating To Non-Marketed Products

We have also entered into licensing agreements pursuant to which we have licensed certain rights under our Queen et al. patents to make, use and sell
certain products in development that have not yet reached commercialization. Certain of these development-stage products are currently in Phase 3 clinical trials. With respect to these agreements, we may receive milestone payments based on certain
development milestones. We may also receive royalty payments if the licensed products receive marketing approval and are manufactured or generate sales before the expiration of our Queen et al. patents. For example, both Eli Lilly and Company
(Lilly) and Wyeth have licensed antibodies for the treatment of Alzheimers disease that are currently in Phase 3 clinical trials. Another example is teplizumab which is being studied for the treatment of newly-diagnosed type 1 diabetes
mellitus and which is the subject of a new license agreement with Lilly that we announced in December 2009.

Economic
and Industry-wide Factors

Various economic and industry-wide factors are relevant to us and could affect our business, including the
factors set forth below.



| |  |  | Our business success is dependent in significant part on our success in establishing intellectual property rights and protecting our intellectual
property rights. If we are unable to protect or defend our intellectual property, our royalty revenues and operating results would be adversely affected. Assertion and defense of our intellectual property rights can be expensive and could result in
a significant reduction in the scope or invalidation of our patents, which could adversely affect our results of operations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The manufacture of drugs and antibodies for use as therapeutics in compliance with regulatory requirements is complex, time-consuming and expensive. If
our licensees are unable to manufacture product or product candidates in accordance with FDA and European good manufacturing practices, they may not be able to obtain or retain regulatory approval for products licensed under our patents.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our licensees are subject to stringent regulation with respect to product safety and efficacy by various international, federal, state and local
authorities and may be unable to maintain regulatory approvals for currently licensed products or obtain regulatory approvals for new products. Safety issues could also result in the failure to maintain regulatory approvals or decrease
revenues. For example, due to safety concerns, the marketing authorization for Raptiva was suspended in the European Union and Canada in February 2009 and Genentech began a phased withdrawal of the drug from the United States market in April
2009.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | In March 2010, the Patient Protection and Affordable Care Act was signed into law along with the related Health Care and Education Reconciliation Act
of 2010 (collectively, the Act). The Act represents a major overhaul of the health system in the United States and also includes a number of provisions that may affect our licensees and our royalty revenues.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To be successful, we must attract, retain, and integrate qualified personnel. Our business is managing our antibody humanization patents and royalties
assets which requires a small number of employees. If we cannot recruit and retain qualified personnel, results from our operations could be adversely impacted.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our business success is also dependent on overall economic conditions. The global financial downturn could adversely affect product sales by our
licensees.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

See also the Risk Factors section of this quarterly report for additional information on these
economic and industry-wide and other factors and the impact they could have on our business and results of operations.

CRITICAL ACCOUNTING
POLICIES AND THE USE OF ESTIMATES

Reference is made to Critical Accounting Policies and Uses of Estimates included in Part II,
Item 7 of our Annual Report on

Form 10-K for the year ended December 31, 2009.

Royalty Revenues

Under most of our patent license agreements, we receive 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 or products. We recognize royalty
revenues when we can reliably estimate such amounts and collectibility is reasonably assured. As such, we generally recognize royalty revenues in the quarter reported to us by our licensees, that is, royalty revenues are generally recognized one
quarter following the quarter in which sales by our licensees occurred. Under this accounting policy, the royalty revenues we report are not based upon our estimates and are typically reported in the same period in which we receive payment from our
licensees.

We may also receive annual license maintenance fees, payable at the election of the licensee, to maintain the license in effect.
We have no performance obligations with respect to such fees. Maintenance fees are recognized as they are due and when payment is reasonably assured.

Foreign Currency Hedging Contracts

We hedge certain foreign currency exposures related to our licensees product sales with foreign currency exchange forward contracts and foreign
currency exchange option contracts. In general, these contracts are intended to offset the underlying foreign currency market risks in our royalty revenues. Our exposure to credit risk from these contracts is a function of currency exchange rates
and, therefore, varies over time. We limit the credit risk that our counterparty to these contracts may be unable to perform by transacting with a major bank, and for which we monitor the exposure in the context of current market conditions. We
mitigated the risk of loss by entering into a netting agreement with our counterparty that provides for net settlement should our counterparty default on the forward and options contracts prior to maturity. Therefore, our overall risk of loss in the
event of counterparty default is limited to the amount of any unrecognized gains on outstanding contracts net of any unrecognized losses on outstanding contracts at the date of default. We do not enter into speculative foreign currency transactions.
We have designated the foreign currency contracts as cash flow hedges. At the inception of the hedging relationship and on a quarterly basis, we assess hedge effectiveness. The fair value of the foreign currency hedging contracts is estimated using
pricing models using readily observable inputs from actively quoted markets. The aggregate unrealized gain or loss on our foreign currency exchange contracts net of estimated taxes on the effective portion of the hedge is recorded in
stockholders deficit as accumulated other comprehensive income. Gains or losses on cash flow hedges are recognize as license and other revenue in the same period that the hedged transaction (royalty revenue) impacts earnings. The hedge
effectiveness is dependent upon the amounts of future royalties and if future royalties, based on eurodollar, are lower than forecasted, the amount of ineffectiveness would be reported in our Statements of Income.

Income Taxes

Our
income tax provision is based on income before taxes and is computed using the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using
tax rates projected to be in effect for the year in which the differences are expected to reverse. We record a valuation allowance to reduce our deferred tax assets to the amounts that are more likely than not to be realized. Significant estimates
are required in determining



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our provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations, or the expected results from any future tax examinations. Various
internal and external factors may have favorable or unfavorable effects on our future provision for income taxes. These factors include, but are not limited to, changes in tax laws, regulations and/or rates, the results of any future tax
examinations, changing interpretations of existing tax laws or regulations, changes in estimates of prior years items, past levels of research and development spending, acquisitions, changes in our corporate structure and state of domicile and
changes in overall levels of income before taxes all of which may result in periodic revisions to our provision for income taxes. We accrue tax related interest and penalties associated with uncertain tax positions and include these in income tax
expense in the Statements of Income.

Lease Guarantee

In connection with the divestiture 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 divestiture 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, 2010, the total lease payments for the duration of the
guarantee, which runs through December 2021, are approximately $128.4 million. If Facet were to default, we could 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. We recorded a liability of $10.7 million on our Balance Sheets as of March 31, 2010 and December 31, 2009 which was the estimated fair value of this guarantee. In April 2010, Abbott Laboratories announced that it
had successfully completed a tender offer by its wholly-owned subsidiary, Amber Acquisition Inc., to purchase all of the outstanding shares of common stock of Facet. This acquisition could reduce the probability of Facets default on the
Redwood City leases and the probability that PDL will have to make payments with respect to the lease guarantee.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2010 and 2009

Revenues

Revenues
consist of royalty revenues as well as license and other revenues. During the three months ended March 31, 2010 and 2009, our royalty revenues consisted almost entirely of royalties and maintenance fees earned on sales of products under license
agreements for our Queen et al. patents.



|                       |  |                              |        |                       |   |        |  |      |  
|---------------------- |  | ---------------------------- | ------ | --------------------- | - | ------ |  | ---- | -
|                       |  | Three Months Ended March 31, |        | Change fromPrior
Year |  
|(Dollars in thousands) |  | 2010                         |        | 2009                  |  
|Revenues               |  |                              |        |                       |   |        |  |      |  
|Royalties              |  | $                            | 62,061 |                       | $ | 62,298 |  | 0    | %
|License and other      |  |                              |       |                       |   | 324    |  | -100 | %
|                       |  |                              |        |                       |   |        |  |      |  
|Total revenues         |  | $                            | 62,061 |                       | $ | 62,622 |  | -1   | %
|                       |  |                              |        |                       |   |        |  |      |  

Total revenue for the first quarter of 2010 was $62.1 million as compared with actual results of $62.6 million for
the same period in 2009. Included in first quarter results in 2009 was $17.1 million from MedImmune for sales of Synagis. As a result of ongoing legal disputes with MedImmune and cancellation of their license agreement by us in December 2009, we did
not receive royalties on sales of Synagis in the first quarter of 2010. Excluding MedImmune, first quarter 2010 revenue grew by more than 35% over the first quarter of 2009. The growth was primarily driven by increased fourth quarter 2009 sales of
Avastin, Herceptin, Lucentis, Tysabri and Actemra for which PDL received royalties in the first quarter of 2010.

Reported sales of Avastin
and Herceptin increased 18% and 11%, respectively, when compared to the same period for the prior year. Also contributing to increased Avastin and Herceptin royalties are product sales that are ex-U.S. manufactured and sold and for which PDL
receives a flat 3% royalty as compared to the tiered royalty that it receives from Genentech for product sales that are either manufactured or sold in the United States. As a percent of total Herceptin sales, ex-U.S. manufactured and sold Herceptin
increased to 43% from 16% for the same period in the prior year. Ex-U.S. manufactured and sold Avastin sales represented 5% of total Avastin sales. This is the first quarter in which PDL received royalties on sales of ex-U.S. manufactured and sold
Avastin.

Reported sales of Lucentis increased 64% when compared to the same period for the prior year. Ex-U.S. sales of Lucentis, which is
approved in more than 80 countries worldwide, increased 88% when compared to the same period for the prior year and represented 57% of total global sales.



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##### Table of Contents

Reported sales of Tysabri increased 32% when compared to the same period for the prior year. Ex-U.S. sales
of Tysabri increased 45% when compared to the same period for the prior year, and represented 53% of total global sales. Elan recently reported a 30% increase in the worldwide Tysabri patient population at the end of December 2009 as compared with
December 2008. The sales information presented above is based on information provided by PDLs licensees in their quarterly reports to the Company.

The following table summarizes revenues from our licensees products which individually accounted for 10% or more of our total revenues for the
three months ended March 31, 2010 and 2009:



|                              |  |              |  |                             |   |  |      |  
|----------------------------- |  | ------------ |  | --------------------------- | - |  | ---- | -
|                              |  |              |  | Three Months EndedMarch 31, |  
|Licensees                     |  | Product Name |  | 2010                        |   |  | 2009 |  
|Genentech, Inc. (Genentech)   |  | Avastin®     |  | 27                          | % |  | 22   | %
|                              |  | Herceptin®   |  | 38                          | % |  | 26   | %
|                              |  | Lucentis®    |  | 12                          | % |  | 7    | %
|                              |  |              | 
|MedImmune, LLC
(MedImmune)(1) |  | Synagis®     |  |                            |   |  | 27   | %
|                              |  |              | 
|Elan Corporation, Plc (Elan)  |  | Tysabri®     |  | 14                          | % |  | 11   | %



|(1) | In December 2009, we sent a letter to MedImmune stating that it is in breach of its obligations under the license agreement, canceling the license agreement and
revoking any licenses and rights granted therein. In February 2010, MedImmune made a royalty payment to an escrow account created pendente lite (while the litigation pending). We do not expect to receive additional payments from MedImmune
unless and until the lawsuit is resolved in our favor. For further information, see Part II. Other Information, Item 1, Legal Proceedings.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under most of the agreements for the license of rights under our humanization patents, we receive a flat-rate royalty based upon our licensees net
sales of covered products. Royalty payments are generally due one quarter in arrears; that is, generally in the second month of the quarter after the licensee has sold the royalty-bearing product. Our agreement with Genentech provides for a tiered
royalty structure under which the royalty rates Genentech must pay on the U.S.-based Sales in a given calendar year decreases on incremental U.S.-based Sales above several net sales thresholds. As a result of the tiered royalty structure,
Genentechs average annual royalty rate for a given year will decline as Genentechs U.S.-based Sales increase during that year. Because we receive royalties in arrears, the average royalty rate for the payments we receive from Genentech
in the second calendar quarter for Genentechs sales from the first calendar quarter has been and is expected to continue to be higher than the average royalty rate for following quarters. The average royalty rate for payments we receive from
Genentech are generally lowest in the fourth and first calendar quarters for Genentechs sales from the third and fourth calendar quarters when more of Genentechs U.S.-based Sales bear royalties at the lowest royalty rate. With respect to
the ex-U.S.-based Manufacturing and Sales, the royalty rate that we receive from Genentech is a fixed rate of 3% based on a percentage of the underlying ex-U.S.-based Manufacturing and Sales. The mix of U.S.-based Sales and ex-U.S.-based
Manufacturing and Sales has fluctuated in the past and may continue to fluctuate in future periods, particularly in light of the 2009 acquisition of Genentech by Roche.

General and Administrative Expenses



|                                    |  |                              |       |                       |   |       |  |     |  
|----------------------------------- |  | ---------------------------- | ----- | --------------------- | - | ----- |  | --- | -
|                                    |  | Three Months EndedMarch 
31, |       | Change fromPrior Year |  
|(Dollars in thousands)              |  | 2010                         |       | 2009                  |  
|General and administrative expenses |  | $                            | 9,410 |                       | $ | 4,693 |  | 101 | %

The increase in general and
administrative expenses was primarily driven by increased legal expense and compensation expense. The increase in legal fee expense is a result of continuing legal disputes with MedImmune and the initiation of two interference proceedings with the
U.S. Patent and Trademark Office in February and November 2009. For further information, see Part II. Other Information, Item 1, Legal Proceedings. Compensation expense increased primarily as a result of filling staff positions
which were vacant in the first quarter of 2009. We currently have fewer than ten employees managing our intellectual property, our licensing operations and other corporate activities, as well as providing for certain essential reporting and
management functions of a public company.



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Individual components of general and administrative expenses for the three months ended March 31, 2010
and 2009 comprise:



|                                          |  |                              |       |                       |   |       |  |     |  
|----------------------------------------- |  | ---------------------------- | ----- | --------------------- | - | ----- |  | --- | -
|                                          |  | Three Months Ended March 31, |       | Change fromPrior Year |  
|(Dollars in thousands)                    |  | 2010                         |       | 2009                  |  
|Compensation and benefits                 |  | $                            | 1,001 |                       | $ | 739   |  | 35  | %
|Legal expense                             |  |                              | 6,350 |                       |   | 1,560 |  | 307 | %
|Other professional service                |  |                              | 1,078 |                       |   | 729   |  | 48  | %
|Insurance                                 |  |                              | 228   |                       |   | 247   |  | -8  | %
|Depreciation                              |  |                              | 34    |                       |   | 887   |  | -96 | %
|Stock-based compensation                  |  |                              | 188   |                       |   | 196   |  | -4  | %
|Other                                     |  |                              | 531   |                       |   | 335   |  | 59  | %
|                                          |  |                              |       |                       |   |       |  |     |  
|Total general and administrative expenses |  | $                            | 9,410 |                       | $ | 4,693 |  | 101 | %
|                                          |  |                              |       |                       |   |       |  |     |  

Non-operating Income and Expense, Net



|                                     |  |                              |         |   |                       |   |        |   |  |     |  
|------------------------------------ |  | ---------------------------- | ------- | - | --------------------- | - | ------ | - |  | --- | -
|                                     |  | Three Months Ended March 31, |         |   | Change fromPrior Year |  
|(Dollars in thousands)               |  | 2010                         |         |   | 2009                  |   |       
|Interest and other income, net       |  | $                            | 80      |   |                       | $ | 336    |   |  | -76 | %
|Interest expense                     |  |                              | (12,527 | ) |                       |   | (3,574 | ) |  | 251 | %
|                                     |  |                              |         |   |                       |   |        |   |  |     |  
|Total non-operating income (expense) |  | $                            | (12,447 | ) |                       | $ | (3,238 | ) |  | 284 | %
|                                     |  |                              |         |   |                       |   |        |   |  |     |  

Interest and other income, net, for the three months ended March 31, 2010 decreased from the same period in
2009 due to lower interest rates earned on our investments as well as lower average investment balances.

Interest expense increased as a
result of the issuance of the $300 million QHP Notes which bear interest at 10.25% per annum in November 2009. The increase was partially offset by the repurchase of $50 million of our 2023 Notes and the repurchase of $22 million of our 2012
Notes in the second and third quarters of 2009.

Income Taxes

Income tax expense during the three months ended March 31, 2010 and 2009 was $14.2 million and $17.2 million, respectively, which resulted primarily
from applying the federal statutory income tax rate to income from operations. Following the relocation of our principal place of business to Incline Village, Nevada in December 2008, we have no continuing operations in California. Nevada does not
impose an income tax and, accordingly, we no longer have any ongoing material state income tax expense. As a result, we expect that our effective income tax rate going forward will be approximately 35%.

LIQUIDITY AND CAPITAL RESOURCES

To
date, we have financed our operations primarily through public and private placements of equity and debt securities, product sales revenues, royalty revenues, license revenues, collaboration and other revenues under agreements with third parties and
interest income on invested capital. Since the divestiture of our commercial and biotechnology operations in 2008, we have significantly downsized our operations and currently have fewer than ten employees managing our intellectual property and our
licensing operations, as well as providing for certain essential reporting and management functions of a public company.

We had cash and cash
equivalents in the aggregate of $319.7 million and $303.2 million at March 31, 2010 and December 31, 2009, respectively. The $16.5 million increase was primarily attributable to net cash provided by operating activities of $26.9
million, partially offset by our payment of $12.6 million in principal on the QHP Notes. As a result of our downsized operations, we believe that cash from future revenues, 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.

We continuously evaluate alternatives to increase return for our
stockholders, for example, purchasing royalty generating assets, buying back our convertible notes, repurchasing our common stock, selling the company or paying dividends. On January 27, 2010, our board of directors declared two special cash
dividends of $0.50 per share payable on April 1, 2010 and October 1, 2010. As of March 31, 2010, we accrued $120.0 million in dividends payable for the April and October dividend payments. Using proceeds from our first quarter 2010
earnings and cash on hand and based on the total shares outstanding as of the March 15, 2010 record date, we paid $59.8 million to our stockholders on April 1, 2010. The record date for the October 1, 2010 dividend is
September 15, 2010.



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Our material contractual obligations under lease and debt agreements for the next five years and thereafter
are as follows:



|                                                    |  |                        |         |           |   |           |  |                  |   |       |   |   |  |   |        
|--------------------------------------------------- |  | ---------------------- | ------- | --------- | - | --------- |  | ---------------- | - | ----- | - | - |  | - | -------
|                                                    |  | Payments Due by Period
|(In thousands)                                      |  | Less Than1 Year        |         | 1-3 Years |   | 4-5 Years |  | More than5 Years |   | Total
|Operating leases                                    |  | $                      | 220     |           | $ | 39        |  | $                | 4 |       | $ |  |  | $ | 263    
|Convertible notes (including interest
payments)(1)  |  |                        | 207,288 |           |   | 232,560   |  |                  |  |       |   |  |  |   | 439,848
|Non-recourse notes (including interest
payments)(2) |  |                        | 110,163 |           |   | 223,853   |  |                  |  |       |   |  |  |   | 334,016
|                                                    |  |                        |         |           |   |           |  |                  |   |       |   |   |  |   |        
|Total contractual obligations                       |  | $                      | 317,671 |           | $ | 456,452   |  | $                | 4 |       | $ |  |  | $ | 774,127
|                                                    |  |                        |         |           |   |           |  |                  |   |       |   |   |  |   |        



|(1) | The 2023 Notes are shown as being due in the less than 1 year column as such notes are puttable by note holders in August 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(2) | Repayment of the Non-recourse Notes and interest are estimated based on anticipated future royalties to be received from Genentech and the anticipated final payment
date is December 2012.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2012 Notes

In February 2005, we issued 2.00% Convertible Senior Notes due February 15, 2012 with a principal amount of $250.0 million (2012 Notes). The 2012
Notes are convertible at any time, at the holders option, into our common stock at a conversion rate of 128.318 shares of common stock per $1,000 principal amount of the 2012 Notes or $7.79 per share of common stock, as adjusted for the cash
dividend to be paid on April 1, 2010 and subject to further adjustment in certain events. Interest on the 2012 Notes is payable semiannually in arrears on February 15 and August 15 of each year. The 2012 Notes are our senior unsecured
debt and have been redeemable by us in whole or in part since February 19, 2010 at 100.57% of principal amount if redeemed between February 19, 2010 and February 14, 2011 and at 100.29% of principal amount if redeemed between
February 15, 2011 and the maturity date. The 2012 Notes are not puttable other than in the context of a fundamental change resulting in the reclassification, conversion, exchange or cancellation of our common stock. Such repurchase event or
fundamental change is generally defined to include a merger involving PDL, an acquisition of a majority of PDLs outstanding common stock, and a change of a majority of PDLs board of directors without the approval of the board of
directors.

2023 Notes

In July 2003, we issued 2.75% Convertible Subordinated Notes due August 16, 2023 with a principal amount of $250.0 million (2023 Notes). The 2023
Notes are convertible at any time, at the holders option, into our common stock at a conversion rate of 177.1594 shares of common stock per $1,000 principal amount of the 2023 Notes or $5.64 per share of common stock, as adjusted for the cash
dividend to be paid on April 1, 2010, and subject to further adjustment in certain events. Interest on the 2023 Notes is payable semiannually in arrears on February 16 and August 16 of each year. The 2023 Notes are unsecured and are
subordinated to all our existing and future senior indebtedness. The 2023 Notes may be redeemed at our option, in whole or in part, at par value. Holders of the 2023 Notes may require us to repurchase all or a portion of their notes at 100% of their
principal amount, plus any accrued and unpaid interest, on August 16, 2010, August 16, 2013 and August 16, 2018, and upon the occurrence of a repurchase event in which a change in control has occurred or our common stock is
neither listed on a U.S. national securities exchange nor approved for trading over-the-counter. For any 2023 Notes to be repurchased in August 2010, we must pay for the repurchase in cash, and we may pay for the repurchase of any 2023 Notes to be
repurchased in August 2013 and August 2018, at our option, in cash, shares of our common stock or a combination of cash and shares of our common stock at the conversion rate then in effect. During the three months ended March 31, 2010, certain
holders of the 2023 Notes converted $20,000 into 3,294 shares of common stock. During April 2010, we repurchased an aggregate of $77.2 million face value of our 2023 Notes, at a premium of 19% to face value in privately negotiated transactions
with institutional holders, for aggregate consideration of $92.1 million in cash, plus accrued but unpaid interest.

Non-Recourse Notes

On November 2, 2009, we completed a $300 million securitization transaction in which we monetized 60% of the net present value of the estimated five
year royalties from sales of Genentech products (the Genentech Royalties) including Avastin, Herceptin, Lucentis, Xolair and future products, if any, under which Genentech may take a license under our related agreements with Genentech. The QHP Notes
bear interest at 10.25% per annum and were issued in a non-registered offering by QHP, a Delaware limited liability company, and a newly formed, wholly-owned subsidiary of PDL. The Genentech Royalties and other payments, if any, that QHP will
be entitled to receive under the agreements with Genentech, together with any funds made available from certain accounts of QHP, will be the sole source of payment of principal, interest and premium on the QHP Notes, which will be secured by a
continuing security interest granted by QHP in its rights to receive payments under such agreements and all of its other assets and a pledge by the equity holder (initially PDL) of its equity ownership interest in QHP. The QHP Notes may be redeemed
at any time prior to maturity, in whole or in part, at the option of QHP at a make-whole redemption price.



20



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Operating Lease

In February 2010, we entered into a lease amendment to extend our building lease term to May 2011 and obtained an option to further extend the lease until
May 2012 for our office in Incline Village, Nevada.

Contractual Obligations

At March 31, 2010, our principal obligations are our convertible notes and our non-recourse notes, which in the aggregate total $715.4 million in
principal. As discussed above, the 2012 Notes are not puttable other than in the context of a fundamental change and our 2023 Notes have a put right in August 2010, August 2013, and August 2018. The current conversion price of
the 2023 Notes is $5.64 per share of our common stock and, accordingly, we expect that our debt service obligations over the next few years will consist solely of interest payments on these notes and repayment of the 2012 Notes at maturity. To
the extent holders of our 2023 Notes require us to repurchase all or a portion of their notes in August 2010 for cash should the then-current trading price of our common stock fall below the conversion price then in effect, we believe we will have
sufficient funds for such repurchase from operating income together with our cash on hand, although we will evaluate our liquidity situation at such time and determine whether we should also undertake additional financings. We may also redeem,
repurchase or otherwise acquire one or both series of 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 redemptions or repurchases only
if we deemed it to be in our stockholders best interest. We may finance such redemptions or repurchases with cash on hand and/or with public or private equity or debt financings if we deem such financings are available on favorable terms.

Off-Balance Sheet Arrangements

Lease Guarantee

In
connection with the divestiture 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 divestiture 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, 2010, the total lease payments for the duration of the guarantee, which runs through December 2021, are approximately $128.4 million. If Facet were to default,
we could 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. In April 2010, Abbott Laboratories announced that it had successfully completed
a tender offer by its wholly-owned subsidiary, Amber Acquisition Inc., to purchase all of the outstanding shares of common stock of Facet. This acquisition could reduce the probability of Facets default on the Redwood City leases and the
probability that PDL will have to make payments with respect to the lease guarantee.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Currency Exchange Risk

The underlying sales of our licensees products are conducted in multiple countries and in multiple currencies throughout the world. 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 in relation to other currencies, the converted amount is greater than it would have been had the U.S. dollar not weakened. Approximately 50% of our
licensees product sales are in currencies other than U.S. dollars; as such, our revenue may fluctuate due to changes in foreign currency exchange rates and is subject to foreign currency risk. For example, in a quarter in which we generate $60
million in revenue, approximately $30 million is based on sales in currencies other than the U.S. dollar. If the U.S. dollar weakens across all currencies by ten percent during the conversion 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 million more in the current quarter than in the prior year.

We hedge certain foreign currency exposures related to our licensees product sales with foreign currency exchange forward contracts and foreign
currency exchange option contracts. In general, these contracts are intended to offset the underlying foreign currency market risk in our royalty revenues. Our exposure to credit risk from these contracts is a function of currency exchange rates
and, therefore, varies over time. We limit the credit risk that our counterparty to these contracts may be unable to perform by transacting with a major bank, and for which we monitor the exposure in the context of current market conditions. We
mitigated the risk of loss by entering into a netting agreement with our counterparty that provides for net settlement should our counterparty default on the forward and options contracts prior to maturity. Therefore, our overall risk of loss in the
event of counterparty default is limited to the amount of any unrecognized gains on outstanding contracts net of any unrecognized losses on outstanding contracts at the date of default.

In January 2010, we entered into with a series of foreign currency exchange forward contracts and foreign currency exchange option contracts
(collectively, foreign currency exchange contracts) covering the eight quarters in which our licensees sales occur for the two years ended December 2011. We did not have foreign currency hedging contracts prior to January 2010. We have
designated the foreign currency exchange contracts as cash flow hedges. At the inception of the hedging relationship and on a quarterly basis, we assess hedge effectiveness. The aggregate unrealized gain or loss on the effective component of our
foreign currency exchange contracts net of estimated taxes is recorded in stockholders deficit as accumulated other comprehensive income. Gains or losses on cash flow hedges are recognized as license and other revenue in the same period that
the hedged transaction (royalty revenue) impacts earnings.

The following table summarizes the notional amounts, currency exchange rates and
fair values of our open foreign currency exchange forward and option contracts designated as hedges at March 31, 2010:



|                                            |  |                               |         |                                    |      |                          |   |       |  |                      
|------------------------------------------- |  | ----------------------------- | ------- | ---------------------------------- | ---- | ------------------------ | - | ----- |  | ---------------------
|Foreign Currency Exchange Forward Contracts |  |                               |         |                                   
|                                            |  |                               |         |                                   
|Currency                                    |  | Notional Amount(In thousands) |         | Settlement Price($ per eurodollar) |      | Fair Value(In thousands) |   | Type 
|Eurodollar                                  |  | $                             | 217,819 |                                    | 1.40 |                          | $ | 7,720 |  | Sell eurodollar      
|                                            |  |                              
|Foreign Currency Exchange Option Contracts  |  |                               |         |                                   
|                                            |  |                               |         |                                   
|Currency                                    |  | Notional Amount(In
thousands) |         | Strike Price($ per eurodollar)     |      | Fair Value(In
thousands) |   | Type 
|Eurodollar                                  |  | $                             | 234,934 |                                    | 1.51 |                          | $ | 2,068 |  | Purchased call option

Interest Rate Risk

The following table
presents information about our material debt obligations that are sensitive to changes in interest rates. The table presents principal amounts and related weighted-average interest rates by year of expected maturity for our debt obligations or the
earliest in which the noteholders may put the debt to us. Our convertible notes may be converted to common stock prior to the maturity date.



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|                      |  |      |         |   |      |   |         |      |  |   |         |   |            |   |         |  |   |         |    
|--------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | ---------- | - | ------- |  | - | ------- | ---
|(In thousands)        |  | 2010 |         |   | 2011 |   |         | 2012 |  |   | Total   |   | Fair Value |  
|Convertible notes     |  |      |         |   |      |   |         |      |  |   |         |   |            |   |         |  |   |         |    
|Fixed Rate            |  | $    | 199,978 |   |      | $ |        |      |  | $ | 228,000 |   |            | $ | 427,978 |  | $ | 447,900 | (1)
|Average Interest Rate |  |      | 2.17    | % |      |   | 2.00    | %    |  |   | 2.00    | % |            |   |         |  |   |         |    
|                      |  |      |         |   |     
|Non-recourse notes    |  |      |         |   |      |   |         |      |  |   |         |   |            |   |         |  |   |         |    
|Fixed
Rate(3)         |  | $    | 68,084  |   |      | $ | 100,283 |      |  | $ | 119,012 |   |            | $ | 287,379 |  | $ | 287,379 | (2)
|Average Interest Rate |  |      | 10.25   | % |      |   | 10.25   | %    |  |   | 10.25   | % |            |   |         |  |   |         |    



|(1) | The fair value of the remaining payments under our convertible notes was estimated based on the trading value of these notes at March 31, 2010.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The fair value of the QHP Notes at March 31, 2010 was estimated to be the carrying value of the notes because management believes that the QHP Notes terms
and conditions approximate current market rates.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Repayment of the QHP Notes is based on anticipated future royalties to be received from Genentech and the anticipated final payment date is December 2012.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|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. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2010, 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 recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.

Changes in Internal Controls.

There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

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, 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
|------- | -----------------

European Opposition to 216 Patent

In November 2003, in an appeal proceeding of a prior action of the Opposition Division of the European Patent Office, the Technical Board of Appeal
of the European Patent Office ordered that certain claims in our 216 Patent be remitted to the Opposition Division for further prosecution and consideration of issues of patentability, that is, entitlement to priority, novelty, enablement and
inventive step. These claims cover the production of humanized antibody light chains that contain amino acid substitutions made under our antibody humanization technology. In April 2007, at an oral proceeding, the Opposition Division
upheld claims that are virtually identical to the claims remitted by the Technical Board of Appeal to the Opposition Division. The deadline for filing a notice of appeal has expired. Five opponents filed such notices in a timely manner
and, of those, three have filed Grounds of Appeal. The 216 Patent remains enforceable during the appeal process. The Technical Board of Appeal has not scheduled a date for the appeal hearing with respect to the 216 Patent. We intend
to vigorously defend the 216 Patent in this proceeding.



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Action for Declaratory Judgment by MedImmune

In December 2008, MedImmune filed a lawsuit against us in the United States District Court for the Northern District of California. MedImmunes
complaint seeks a declaratory judgment that the U.S. Queen et al. patents are invalid and/or not infringed by its Synagis and motavizumab products and, that therefore, MedImmune owes no royalties under its license agreement with us. MedImmunes
complaint further alleges (i) that if our patents are valid and infringed by Synagis and/or motavizumab, MedImmune is now or was retroactively entitled to a lower royalty rate on its sales of infringing products under the most favored licensee
clause in our agreement, (ii) breach of contract, (iii) breach of the covenant of good faith and fair dealing, and (iv) fraud. We answered MedImmunes complaint alleging certain counterclaims, including alleging that MedImmune
has breached the license agreement, and certain affirmative defenses against each of MedImmunes claims. As a result of MedImmunes breach of the license agreement, we have terminated the agreement and have further alleged in a
counterclaim that MedImmunes commercial activities involving Synagis and motavizumab in the United States infringe the 370 patent.

MedImmune has requested that the court award compensatory and punitive damages for breach of contract and fraud, attorneys fees, and an order
reinstating the license agreement. We are seeking an award of damages for breach of contract and patent infringement, treble damages for willful infringement, attorneys fees and a permanent injunction against continued infringement.

On February 22, 2010, the court issued an order construing the claim language at issue in the litigation. The court generally construed
the claim language at issue as proposed by PDL. In March of 2010, the court issued orders denying MedImmunes requests for a preliminary injunction against our cancellation of the license agreement, to strike our breach of contract counter
claims, and for summary judgment that MedImmune is entitled under the most favored licensee clause in our agreement to a fully paid-up license as of December 2008 as a result of our agreement with Alexion and, retroactively to 1998, to a reduced
royalty rate on sales of Synagis.

A jury trial is scheduled to begin on January 25, 2011. In the event that MedImmune prevails on the
claims in its complaint, we expect that MedImmune will request the court to order a recoupment of some or all of the payments made to us under its license to the Queen et al. patents.

Interference Proceedings in the U.S. Patent and Trademark Office

On February 25, 2009, the PTO declared an interference proceeding between certain claims of the 089 Patent and certain pending claims of Adair
et al., the 658 Application under 35 U.S.C. 135(a) (the 658 Application). UCB Pharma S.A. is the assignee of the 658 Application. A hearing was held on January 29, 2010 regarding the first phase of the interference, which
relates to substantive motions except those for priority of invention. A decision has not yet been issued. The PTO has scheduled proceedings for the determination of priority of invention, if necessary.

On November 23, 2009, the PTO declared an interference proceeding between certain claims of the 370 Patent and certain pending claims of Adair
et al., the 117 Application under 35 U.S.C. 135(a) (the 117 Application). UCB Pharma S.A. is the assignee of the 117 Application.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have
been no material changes from the risk factors disclosed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2009.

You should carefully consider and evaluate all of the information included and incorporated by reference in this Quarterly Report, including the risk
factors listed below. Any of these risks, 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 shares of our common stock. Additional risks not currently known or currently material to us may also harm our business.

Keep these risk factors in mind when you read forward-looking statements contained in this Quarterly Report and the documents incorporated by reference
in this Quarterly Report. These statements relate to our expectations about future events and time periods. In some cases, you can identify forward-looking statements by terminology such as may, will,
intends, plans, believes, anticipates, expects, estimates, predicts, potential, continue or opportunity, the negative of these
words or words of similar import. Similarly, statements that describe our reserves and our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Forward-looking statements
involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements.



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Our antibody humanization patents, which are of significant value to us, are being
challenged in various administrative proceedings and a successful challenge could limit our future revenues.

One of the Queen et al.
patents was issued to us by the European Patent Office, the 216 Patent. Eighteen notices of opposition to our 216 Patent were filed by major pharmaceutical and biotechnology companies, among others. Each of our granted and applied
for SPCs are based on the 216 Patent, and an adverse decision in the pending European opposition to our 216 Patent will have a material negative impact on our ability to collect royalties on European sales of our licensees products
manufactured outside the United States and could encourage challenges to our related Queen et al. patents in other jurisdictions including the United States.

In addition, the PTO has declared interference proceedings between certain claims of our patents and certain pending claims of Adair et al under 35
U.S.C. Section 135(a). On February 25, 2009, Interference No. 105,688 was declared between certain claims of the 089 Patent and certain pending claims of the 658 Application, and on November 23, 2009,
Interference No. 105,705 was declared between certain claims of the 370 Patent and certain pending claims of the 117 Application. Any final decision in an interference proceeding, if adverse to the claim of an applicant, is a final
refusal by the PTO of the claims involved. A final judgment adverse to us from which no appeal or other review has been or can be taken or had constitutes cancellation of the claims involved in the patent and could have a material negative impact on
our ability to collect royalties on the sale or manufacture of licensees products in the United States. The 216 Patent is also discussed in the following risk factor. See Part II. Other Information, Item 1, Legal Proceedings.

Our right to continue to collect royalties based on European sales and manufacture may depend on our ability to enforce
our 216 Patent claims under our supplementary protection certificates.

We have applied for SPCs under our 216 Patent in
various European national patent offices to cover Avastin, Herceptin, Xolair, Lucentis, Synagis, Tysabri and Cimzia (collectively, the SPC Products). Because our 216 Patent expired on December 28, 2009, our ability to collect revenues for
manufacture and sale of the SPC Products in Europe will depend on the enforceability of the patent claims underlying our SPCs which generally expire in 2014. These SPCs extend the enforceability of our 216 Patent against the SPC Products, but
are subject to the varying, complex and evolving national requirements and standards for enforcement of patent claims pursuant to SPCs. As a result of these factors, we are unable to predict the extent of protection afforded by our SPCs.

We do not anticipate receiving royalties on MedImmunes sales of Synagis until resolution of our lawsuit with them and,
depending on the outcome of that lawsuit, may have to repay previously received royalties.

In December 2008, MedImmune, a
subsidiary of AstraZeneca plc, filed a lawsuit against us in the United States District Court for the Northern District of California. MedImmunes complaint seeks a declaratory judgment that the U.S. Queen et al. patents are invalid and/or not
infringed by its Synagis and motavizumab products and, that therefore, MedImmune owes no royalties under its license agreement with us. MedImmunes complaint further alleges (i) that if our patents are valid and infringed by Synagis and/or
motavizumab, MedImmune is now or was retroactively entitled to a lower royalty rate on its sales of infringing products under the most favored licensee clause in our agreement, (ii) breach of contract, (iii) breach of the covenant of good
faith and fair dealing, and (iv) fraud. We answered MedImmunes complaint alleging certain counterclaims, including alleging that MedImmune has breached the license agreement, and certain affirmative defenses against each of
MedImmunes claims. As a result of MedImmunes breach of the license agreement, we have terminated the agreement and, as a result, have further alleged in our answer that MedImmunes commercial activities involving Synagis and
motavizumab in the United States infringe the 370 patent. MedImmune has requested that the court award compensatory and punitive damages for breach of contract and fraud, attorneys fees, and an order reinstating the license agreement. We
are seeking an award of damages for breach of contract and patent infringement, treble damages for willful infringement, attorneys fees and a permanent injunction against continued infringement.

In February 2010, MedImmune made a royalty payment to an escrow account created pendente lite(while the litigation is pending). We do not expect
to receive additional payments from MedImmune unless and until the lawsuit is resolved in our favor. In the event that MedImmune prevails on the claims in its complaint, we expect that MedImmune will request the court to order a recoupment of some
or all of the payments made to us which represent obligations under its license to the Queen et al. patents. In the event that we prevail on our claims of patent infringement and breach of the license agreement, we expect to request that MedImmune
pay damages for breach of the license, pay treble damages for willful infringement and either desist further infringement or pay royalties at a rate to be determined. See Part II. Other Information, Item 1, Legal Proceedings.

We must protect our patent and other intellectual property rights to succeed.

Our success is dependent in a significant part on our ability to protect the scope, validity and enforceability of our patents. The scope, validity,
enforceability and effective term of patents can be highly uncertain and often involve complex legal and factual questions and proceedings. When our patents are challenged, they may be invalidated, circumvented or rendered unenforceable by the
adjudicating tribunal. A finding that some or all of our patent rights are invalid or unenforceable in such a proceeding may have a material impact on our ability to continue to collect royalty payments from our licensees or conclude new
royalty generating license agreements. Similarly, a finding narrowing the scope of some or all of our patent rights could likewise have a material impact on our ability to continue to collect royalty payments from our licensees or conclude new
license agreements.



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U.S. patents and patent applications may also be subject to interference proceedings and to reexamination or
reissue proceedings in the PTO and foreign patents may be subject to opposition or nullification or similar proceedings in the various national and regional patent offices in which we have applied for and received patent rights and/or SPCs. Any of
these proceedings could result in either loss of the patent or loss or reduction in the scope of one or more of the claims of the patent. These proceedings could be expensive, last several years and result in a significant reduction in the scope or
invalidation of our patents. Any limitation in claim scope could reduce our ability to collect royalties or commence enforcement proceedings based on these patents. Moreover, the scope of a patent in one country does not assure similar
scope of a patent with similar claims in another country. Also, claim interpretation and infringement laws vary among countries. As a result of these factors, we are unable to predict the extent of patent protection in any country. See
Part II. Other Information, Item 1, Legal Proceedings.

We derive a significant portion of our royalty
revenues from Genentech and our future success depends on continued market acceptance of their products and approval of their licensed products that are in development.

Our revenues consist almost entirely of royalties from licensees of our Queen et al. patents and, in future periods, we may receive milestone payments if
the licensed products in development achieve certain development milestones and royalty payments if the licensed products receive marketing approval before the expiration of our Queen et al. patents. Genentech accounted for 82%, 71%, 73% and
79% of our revenues from continuing operations for the quarter ended March 31, 2010 and the years ended December 31, 2009, 2008 and 2007, respectively. Our future success depends primarily upon the continued market acceptance of
Genentech and other licensees commercialized products and the performance by our licensees of their obligations under the applicable license agreements. In addition, our ability to generate royalty revenue depends upon the ability of Genentech
and our other licensees to develop, introduce and deliver products that achieve and sustain market acceptance. For example, 60% of the royalties we currently receive from Genentech are dedicated to service the debt related to the QHP Notes that
we, through our wholly-owned subsidiary, QHP, issued in November 2009. We have no control over the sales efforts of Genentech and our other licensees, and our licensees might not be successful. Reductions in the sales volume or average selling
price of licensed products could have a material adverse effect on our business.

Our licensees may be unable to
maintain regulatory approvals for currently licensed products or obtain regulatory approvals for new products. Safety issues could also result in the failure to maintain regulatory approvals or decrease revenues.

Our licensees are subject to stringent regulation with respect to product safety and efficacy by various international, federal, state and local
authorities. Of particular significance are the FDAs requirements covering research and development, testing, manufacturing, quality control, labeling and promotion of drugs for human use in the United States. As a result of these
requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a biologic license application or new drug application are substantial and can require a number of years. In
addition, even if our licensees products receive regulatory approval, they remain subject to ongoing FDA and other international regulations including, but not limited to, obligations to conduct additional clinical trials or other testing,
changes to the product label, new or revised regulatory requirements for manufacturing practices, written advisements to physicians and/or a product recall or withdrawal. Our licensees may not maintain necessary regulatory approvals for their
existing licensed products or our licensees may not obtain necessary regulatory approvals on a timely basis, if at all, for any of the licensed products our licensees are developing or manufacturing. The occurrence of adverse events reported by
any licensee may result in the revocation of regulatory approvals or decreased sales of the applicable product due to a change in physicians willingness to prescribe, or patients willingness to use the applicable product. In either
case, our revenues could be materially and adversely affected.

For example, in February 2005, Elan and Biogen Idec Inc. (Biogen Idec)
announced that they had voluntarily suspended the marketing and commercial distribution of Tysabri, a drug approved for the treatment of multiple sclerosis that is licensed under Queen et al. patents, because of the occurrence of progressive
multifocal leukoencephalopathy (PML), a rare and frequently fatal, demyelinating disease of the central nervous system, in certain patients treated with Tysabri. In July 2006, Elan and Biogen Idec reintroduced Tysabri; however, Tysabris
label now includes prominent warnings regarding the Tysabris risks and Elan and Biogen Idec have implemented a risk management program to inform physicians and patients of the benefits and risks of Tysabri and to minimize the risk of PML
potentially associated with Tysabri. Regulatory authorities worldwide continue to monitor the safety and efficacy of Tysabri. If physicians prescribe Tysabri less frequently due to the PML risk, or if Elan and Biogen Idec or various regulatory
authorities suspend the marketing of Tysabri, the amount of royalties we receive will be adversely affected.

Another example is Raptiva,
Genentechs product for the treatment for psoriasis for which marketing approval was suspended in Europe and in Canada in February 2009 and was then withdrawn from the worldwide market due to safety concerns. We no longer receive royalties on
sales of Raptiva.



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In addition, the current regulatory framework could change or additional regulations could arise at any
stage during our licensees product development or marketing which may affect our licensees ability to obtain or maintain approval of their licensed products. Delays in our licensees receiving regulatory approval for licensed
products or their failure to maintain existing regulatory approvals could have a material adverse effect on our business.

Our licensees face competition.

Our licensees face competition from other pharmaceutical and biotechnology companies. The introduction of new competitive products or follow-on
biologics may result in lost market share for our licensees, reduced utilization of licensed products, lower prices and/or reduced licensed product sales, any of which could reduce our royalty revenue and have a material adverse effect on our
results of operations.

Our revenues and operating results will likely fluctuate in future periods.

Our royalty revenues may be unpredictable and fluctuate because they depend upon, among other things, the seasonality and rate of growth of sales of
licensed products as well as the mix of U.S.-based Sales and ex-U.S.-based Manufacturing and Sales in connection with our master patent license agreement with Genentech.

The Genentech agreement provides for a tiered royalty structure under which the royalty rate Genentech must pay on the U.S.-based Sales in a given
calendar year decreases on incremental U.S.-based Sales above certain net sales thresholds. As a result of the tiered royalty structure, Genentechs average annual royalty rate for a given year declines as Genentechs U.S.-based Sales
increase during that year. Because we receive royalties one quarter in arrears, the average royalty rate for the payments we receive from Genentech in the second calendar quarterwhich would be for Genentechs sales from the first calendar
quarterhas been and is expected to continue to be higher than the average royalty rate for following quarters. The average royalty rate for payments we receive from Genentech is generally lowest in the fourth quarter and first calendar quarter
of the following year, which would be for Genentechs sales from the third and fourth calendar quarter, when Genentechs U.S.-based Sales bear royalties at the lowest royalty rate. With respect to the ex-U.S.-based Manufacturing and Sales,
the royalty rate that we receive from Genentech is a fixed rate of 3.0% based on a percentage of the underlying ex-U.S.-based Manufacturing and Sales. The mix of U.S.-based Sales and ex-U.S.-based Manufacturing and Sales has fluctuated in the past
and may continue to fluctuate in future periods, particularly in light of the 2009 acquisition of Genentech by Roche. For example, in July 2009 Roche announced its decision to partially close its manufacturing site in Vacaville, California.

Approximately 13% of our royalty revenues for the year ended December 31, 2009 were from sales of Synagis, which is marketed by
MedImmune. This product has significantly higher sales in the fall and winter, which to date have resulted in much higher royalties paid to us in our first and second quarters than in other quarters. Due to our ongoing litigation with
MedImmune, we do not expect to receive royalty payments from MedImmune unless and until our lawsuit with MedImmune is resolved in our favor. If we receive additional royalty payments from MedImmune, the seasonality of Synagis sales may continue to
contribute to fluctuation in our revenues from quarter to quarter. See Part II. Other Information, Item 1, Legal Proceedings.

We intend to reserve from time to time a certain amount of cash in order to satisfy the obligations relating to our convertible
notes, which could adversely affect the amount or timing of distributions to our stockholders.

As of March 31, 2010, we had $228
million in principal that remains outstanding under our 2012 Notes and $200 million in principal that remains outstanding under our unsecured 2023 Notes. The 2012 Notes are our senior unsecured debt and have been redeemable by us in whole or in part
since February 19, 2010 at 100.57% of principal amount if redeemed between February 19, 2010 and February 14, 2011 and at 100.29% of principal amount if redeemed between February 15, 2011 and the maturity date. The 2023 Notes may
be redeemed at our option, in whole or in part, at par value. Holders of the 2023 Notes may require us to repurchase all or a portion of their 2023 Notes at 100% of their principal amount plus any unpaid interest for cash on August 16, 2010 and
for cash, or, at our option, shares of our common stock at the then-current conversion price on August 16, 2013 and August 16, 2018. Holders of the 2023 Notes may also require us to repurchase all or a portion of the notes for cash upon
the occurrence of a repurchase event in which a change in control has occurred or our common stock is neither listed on a U.S. national securities exchange nor approved for trading over-the-counter. Similarly, holders of the 2012 Notes may
require us to purchase all or any portion of their 2012 Notes at 100% of their principal amount, plus any unpaid interest, upon a fundamental change resulting in the reclassification, conversion, exchange or cancellation of common stock. Such
repurchase event or fundamental change is generally defined to include a merger involving PDL, an acquisition of a majority of PDLs outstanding common stock and the change of a majority of PDLs board of directors without the approval of
the board of directors.



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We intend to reserve from time to time a certain amount of cash in order to satisfy these repurchase or
other obligations relating to the 2023 Notes and 2012 Notes which could adversely affect the amount or timing of any distribution to our stockholders. We may continue to redeem, repurchase or otherwise acquire one or both series of convertible notes
in the open market in the future either which could adversely affect the amount or timing of any cash distribution to our stockholders.

If
any or all of the 2023 Notes or 2012 Notes are not converted into shares of our common stock before their respective maturity dates, we will have to pay the holders of such notes the full aggregate principal amount of the 2023 Notes or 2012 Notes,
respectively, then outstanding. Any of the above payments could have a material adverse effect on our cash position. If we fail to satisfy these repurchase or other obligations, it may result in a default under the indenture which could result in a
default under certain of our other debt instruments, if any.

The conversion of any of the 2023 Notes or 2012 Notes into
shares of our common stock would have a dilutive effect which could cause our stock price to go down.

The 2023 Notes and 2012 Notes
are currently convertible at any time, at the option of the holder, into shares of our common stock. We have reserved shares of our authorized common stock for issuance upon conversion of the 2023 Notes and 2012 Notes. If any or all of the 2023
Notes or 2012 Notes are converted into shares of our common stock, our existing stockholders will experience immediate dilution and our common stock price may be subject to downward pressure.

In connection with the cash dividend paid on April 1, 2010 to stockholders of record on March 15, 2010, the conversion rates of the 2023 Notes
and 2012 Notes were adjusted upward. The conversion rate for the 2023 Notes, as adjusted, is 177.1594 shares of common stock per $1,000 principal amount or $5.64 per share of common stock. The conversion rate for the 2023 Notes was previously
164.7254 shares of common stock per $1,000 principal amount of the 2023 Notes or $6.07 per share of common stock. The conversion rate for the 2012 Notes, as adjusted, is 128.318 shares of common stock per $1,000 principal amount or $7.79 per share
of common stock. The conversion rate for the 2012 Notes was previously 119.294 shares of common stock per $1,000 principal amount of the 2012 Notes or $8.38 per share of common stock. Because the conversion rates of the 2023 Notes and 2012 Notes
adjust upward upon the occurrence of certain events, such as a dividend payment, our existing stockholders will experience more dilution if any or all of the 2023 Notes or 2012 Notes are converted into shares of our common stock after the adjusted
conversion rates became effective.

Our common stock may lose value due to several factors, including the expiration of
our Queen et al. patents, the payment of dividends or distributions to our stockholders and failure to meet analyst expectations, and our common stock could be delisted from NASDAQ.

Our revenues consist almost entirely of royalties from licensees of our Queen et al. patents, which finally expire in December of 2014. Unless we develop
other revenue streams, we will no longer receive patent-related royalties once our licensees have sold all their inventory of licensed product that was manufactured before the expiration of the Queen et al. patents. As a result, our common stock
will likely lose value.

If we fail to meet the expectations of securities analysts or investors, or if adverse conditions prevail or are
perceived to prevail with respect to our business, the price of the common stock would likely drop significantly.

In addition to all of the
risk factors listed herein, the payment of dividends or distributions to our stockholders may reduce the price of our common stock. If the price of our common stock were to fall below NASDAQ listing standards as we approach the date of patent
expiration, our common stock may be delisted. If our common stock were delisted, market liquidity for our common stock could be severely affected, and our stockholders ability to sell securities in the secondary market could be limited.
Delisting from NASDAQ would negatively affect the value of our common stock. Delisting could also have other negative results, including, but not limited to, the potential loss of confidence by employees, the loss of institutional investor interest
and fewer business development opportunities.

Changes in the third-party reimbursement environment may affect product
sales from which we generate royalty revenues.

Sales of products from which we generate royalties will depend significantly on the
extent to which reimbursement for the cost of such products and related treatments will be available to physicians and patients from various levels of U.S. and international government health administration authorities, private health insurers and
other organizations. Third-party payers and government health administration authorities increasingly attempt to limit and/or regulate the reimbursement of medical products and services, including branded prescription drugs. Changes in
government legislation or regulation, such as the Health Care and Education Reconciliation Act of 2010; the Medicare Improvements for Patients and Providers Act of 2009; the Medicare, Medicaid and State Childrens Health Insurance Program
Extension Act of 2007; the Deficit Reduction Act of 2005; the Medicare Prescription Drug Improvement and Modernization Act of 2003; changes in formulary or compendia listing; or changes in private third-party payers policies toward
reimbursement for such products may reduce reimbursement of the cost of such products to physicians, pharmacies and distributors. Decreases in third-party reimbursement could reduce usage of such products, sales to collaborators and may have a
material adverse effect on our royalties which depend on such product sales. In addition, macroeconomic factors may affect the ability of patients to pay or co-pay for costs or otherwise pay for products from which we generate royalties by, for
example, decreasing the number of patients covered by insurance policies or increasing costs associated with such policies.



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We must attract, retain and integrate key employees in order to succeed. It may
be difficult to recruit, retain and integrate key employees.

To be successful, we must attract, retain and integrate qualified
personnel. Our business is managing our antibody humanization patents and royalties assets which requires only a small number of employees. It may be difficult for us to recruit and retain qualified personnel. If we are unsuccessful in
attracting, retaining and integrating qualified personnel, our business could be impaired.

Our agreements with Facet
may not reflect terms that would have resulted from arms-length negotiations between unaffiliated third parties.

The agreements
associated with the divestiture of Facet in December 2008, including the Separation and Distribution Agreement, Tax Sharing and Indemnification Agreement, Transition Services Agreement and Cross License Agreement, were negotiated in the context of
the divestiture while Facet was still part of PDL and, accordingly, may not reflect more favorable terms that may have resulted from arms-length negotiations between unaffiliated third parties.

We may have obligations for which we may not be able to collect under our indemnification rights from Facet.

Under the terms of the separation and distribution agreement with Facet, we and Facet agreed to indemnify the other from and after the divestiture with
respect to certain indebtedness, liabilities and obligations that were retained by our respective companies. These indemnification obligations could be significant. The ability to satisfy these indemnities, if called upon to do so, will
depend upon the future financial strength of each of our companies. We cannot assure you that, if Facet has to indemnify us for any substantial obligations, Facet will have the ability to satisfy those obligations. If Facet does not have
the ability to satisfy those obligations, we may be required to satisfy those obligations instead. For example, in connection with the divestiture, we entered into amendments to the leases for the facilities in Redwood City, California, which
formerly served as our corporate headquarters and which are now occupied by Facet under which Facet was added as a co-tenant under the leases 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 divestiture date. Should Facet default under its lease obligations, we would 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, the disposition of which could have a material adverse effect on the amount or timing of any distribution to our stockholders. As of March 31, 2010, the total lease payments for the duration of the guarantee, which
runs through December 2021, are approximately $128.4 million. We would also be responsible for lease related payments including utilities, property taxes and common area maintenance which may be as much as the actual lease payments. Abbott
Laboratories (Abbott) and Facet have entered into a definitive agreement whereby Abbott acquired all of the outstanding securities of Facet. While our indemnification rights remain intact with the acquisition of Facet, at this time we do not know
how Abbott intends to operate Facet or, for example, whether Facet will continue to occupy the Redwood City facilities. As a result, we are unable to determine how Abbotts acquisition of Facet will impact our ability to collect under our
indemnification rights or whether Facets ability to satisfy its obligations will change.



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|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                                                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 |  | Certification by the Principal Executive Officer and the Principal Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934,
as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350)



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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: April 30, 2010



PDL BIOPHARMA, INC.(Registrant)/s/    JOHN P.
MCLAUGHLINJohn P. McLaughlinPresident and Chief Executive Officer(Principal Executive Officer)/s/    CHRISTINE R.
LARSONChristine R. LarsonVice President and Chief Financial Officer(Principal Financial Officer)/s/    KAREN J.
WILSONKaren J. WilsonVice President Finance(Principal Accounting Officer)




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