In 2005, we achieved our commercial transformation. Looking ahead, our vision is 2010. 2005 Annual Report 2 LETTER TO SHAREHOLDERS 6 OUR PRODUCTS 14 OUR PIPELINE 20 OUR PERFORMANCE 24 OUR MANAGEMENT 25 FINANCIAL REPORT 102 CORPORATE INFORMATION 104 CODE OF CONDUCT A clear vision: from Through strategic acquisitions and partnerships, we have become a commercial biopharmaceutical company, reflected in our new name, PDL BioPharma. We have a portfolio of acute-care hospital products being commercialized by our own U.S. marketing and sales force. We have a growing and diverse revenue base, six promising product candidates in clinical development and a strategy to fuel our pipeline through internal discovery and collaboration. PDL BIOPHARMA 2005 ANNUAL REPORT 1 ◆ We hit our goal in 2005 to create a commercial business, while enhancing shareholder value. We’ve transformed our business and now we’re focused on becoming a sustainable and growing biopharmaceutical company. 2005 to Vision 2010 We have set our sights even higher over the next five years and as part of our Vision 2010 aims, we are executing the strategies that will enable us to solidify our position as a top-tier biopharmaceutical company. STRATEGY 1 ◆ Reach or maintain No. 1 or No. 2 dollar market shares for marketed drugs STRATEGY 2 ◆ Develop and launch at least three products STRATEGY 3 ◆ Establish a deeper, stronger pipeline STRATEGY 4 ◆ Expand commercial operations to Europe STRATEGY 5 ◆ Sustainably grow revenue and earnings performance 2 LETTER TO SHAREHOLDERS To Our Shareholders… MARK McDADE CHIEF EXECUTIVE OFFICER 2005 was a year of dramatic change. We created antibodies but also now reflects our commercial a new commercial platform in the U.S., com- competence and our future prospects as a pleted two major collaborations to advance our dynamic new drug company. Along with pipeline and met our financial goal of delivering launching this new identity, we outlined our positive cash flow from operations in the fourth Vision 2010 aims, including the potential launches quarter. We’ve also articulated a clear new vision of three new products in the next five years in and set of ambitious aims — Vision 2010 — to the U.S. and/or Europe, top- and bottom-line drive our future commercial, clinical and opera- growth of at least 25% annually, multiple global tional efforts. If successful over the next five years, partnerships and a deeper, stronger pipeline. If I believe PDL BioPharma will be ranked among we achieve these aims, we believe we can reach the top tier of biotechnology firms. $1 billion in total operating revenues by 2010, Simply put, we’ve transformed. Reflecting realizing our vision to evolve from a royalty-based our recent accomplishments, PDL today is a company to a product-generating biopharma- dynamic 1,000-person company focused on ceutical enterprise. the acute-care hospital marketplace with a sales force of approximately 105 field representatives, BUILDING OUR COMMERCIAL ENTERPRISE a healthy revenue stream and a future that we FOCUSED ON GROWTH… feel is bright. Within the past 12 months, we’ve The strategic initiatives that we originated in created a commercial capability aimed at maxi- early 2003 led to a broader revenue stream mizing our marketed product portfolio while and exceptional revenue growth in 2005, and paving the way for potential launches of future transitioned us from a technology platform products into the acute-care marketplace. company principally dependent on royalty-related We’ve evolved so significantly that in revenues. Top-line growth was driven by net January 2006, we changed our name to PDL product sales, by royalties from sales of antibodies BioPharma, a new identity that retains our licensed under our humanization patents, and heritage as a leader in the field of humanized by payments to PDL as part of licensing and PDL BIOPHARMA 2005 ANNUAL REPORT 3 “Welcome to PDL BioPharma, where we’re building a dynamic new drug company supported by a strong foundation of products, pipeline and performance.” collaborative agreements. Revenues from our partnerships: the first in MS and certain three marketed drugs, Cardene® I.V., Retavase® other diseases with Biogen Idec, and the and IV Busulfex,® coupled with our steadily second with Roche, expanding our asthma growing royalty stream, led to a 191% increase alliance to include a second major effort in total revenues to nearly $280 million. aimed at chronic transplantation. These higher revenues enabled PDL to ◆ We acquired ESP Pharma, Inc. and Retavase achieve positive non-GAAP operating earnings for in March 2005, and added a profitable the calendar year, a full year ahead of our plans commercial platform that accelerated our that we outlined at the beginning of 2005. path to profitability while improving our The events of 2005 stemmed from initia- chances of success for product launches tives begun in early 2003. Key among these: of our later stage pipeline. ◆ We acquired Eos in April 2003 to help build ◆ Shortly after going commercial, we a strong research platform. At the time of announced positive Phase 2 results for purchase, M200 was an antibody in pre- a newly acquired compound — ularitide clinical development. In 2005, after entering — in acute decompensated heart failure. multiple Phase 2 studies in solid tumors, These steps have been aided by our team’s we partnered M200 and two additional relentless focus on execution and attaining a antibody programs with Biogen Idec in a commercial presence. We’ve also enhanced our precedent-setting $800 million, “fifty-fifty” team with new talent to help lead us toward the development and profit-sharing transaction. future. With two recent senior team additions, ◆ We acquired all rights to daclizumab back we added an accomplished Chief Financial from Roche in late 2003. At that time, Officer, Andrew Guggenhime, and a seasoned we awaited future Phase 2 results from head of Quality and Compliance, Dr. Peter Calcott. two ongoing studies. That purchase was At the board level, we added Dr. Samuel Broder, validated in 2005 based on two separate the current CMO at Celera and the former head 4 LETTER TO SHAREHOLDERS of the NCI, and Brad Goodwin, the CEO of whose most likely current outcome is surgical Novacea and former VP Finance at Genentech. removal of their colon. Nuvion is currently being At the same time, we’re grateful for the nearly evaluated in a Phase 2/3 clinical trial in the U.S. 20 years of effort from our co-founder and and Europe. Pending an interim analysis antici- director, Dr. Cary Queen, who retired from our pated by the fourth quarter of this year, we expect board in February 2006 but continues to serve to begin a second pivotal double-blind, placebo- as an important advisor and consultant to PDL. controlled Phase 3 study by the end of 2006, Integration of two companies, Eos and and a potential Biologics License Application ESP Pharma, into PDL over the last three years for this product in 2008. PDL currently holds was not easy. Yet we’ve created a confident worldwide rights to this humanized antibody. new culture that takes pride in bringing products Our third proprietary product undergoing to market while working hard on a promising development is ularitide, for which we also hold pipeline of later-stage programs. exclusive and worldwide rights. This product candidate has shown promise in two Phase 2 …WITH A DEEP PIPELINE THAT COULD studies for acute decompensated heart failure. ENABLE THREE PRODUCT LAUNCHES IN We are currently pursuing the Scientific Advice THE NEXT FIVE YEARS procedure with European regulatory authorities, In addition to our commercial progress, we’ve also quietly fashioned a formidable later-stage product pipeline. At the end of 2005, our proprietary pipeline consisted of four antibodies 2006 Key and two peptides. Two of these drugs were not even part of PDL’s pipeline at the beginning of Corporate Aims 2005. Each of the three candidates nearest to ◆ Build market share for our three market — terlipressin, Nuvion® and ularitide — fits with our hospital-based commercial strategy. marketed products By the end of 2006, we expect to have ◆ Grow product and royalty revenues these three compounds in registrational trials with by at least 25% an eye toward our first product launch — for ◆ Achieve clinical progress with three terlipressin — in 2007. Currently, our partner pivotal programs by year end Orphan Therapeutics, LLC is conducting a Phase 3 ◆ clinical trial using terlipressin to treat type 1 Prepare for potential launch of hepatorenal syndrome (HRS), a life-threatening terlipressin in 2007 condition associated with end-stage liver cirrhosis ◆ Advance the development of for which no approved medical therapy exists. daclizumab, M200 and HuZAF ™ We expect to report results from this trial in late with partners 2006 and, if positive, a New Drug Application ◆ Initiate a Phase 1 study with for terlipressin could be submitted in early 2007. new myeloma antibody by year end We hold exclusive rights to market and further ◆ develop this product in North America. Establish European commercial Next in line is Nuvion, our proprietary anti- presence by year end body that could provide a therapeutic alternative ◆ Achieve positive non-GAAP for IV-steroid refractory ulcerative colitis patients earnings on a full-year basis PDL BIOPHARMA 2005 ANNUAL REPORT 5 and expect to begin a Phase 3 study in Europe of this year. We hope this same facility in the second half of 2006. Based on ongoing one day will produce licensed Nuvion, regulatory discussions in the U.S., we also hope should the drug gain regulatory approval. to initiate a study in the U.S. late this year, and 3 We have yet to launch a new drug to cus- to review these findings with the FDA in 2007.