PDL BioPharma...Another Cool Biotech Special Situation
PDL BioPharma (PDLI) is another interesting biotech wind-down. The company's revenue is derived mainly from seven patents that it was awarded between 1996 and 2000. During that period, the Dr. Cary Queen found that one can inject mice with tumor cells to create antibodies which then can be extracted, modified, and used to treat a variety of human illnesses. Interesting stuff.
PDL is no longer active doing research. Instead it has circled the wagons, cut costs, and is attempting to return as much money to shareholders as possible by buying back its convertible bonds and paying dividends to shareholders until its patents expire some time in 2014.
The Company may actually continue to receive revenue from its patents until some time in 2015 because some of the drugs that were produced while the patents were in effect in 2014 will not be distributed for sale until then.
The buying opportunity that we see in PDL today presented itself earlier this month when one of its main customers, Genentech...which formerly traded under the ticker symbol DNA, but now is a division of Swiss drugmaker Roche (RHHBY.PK), sent a letter to PDL stating that it does not believe that many of the drugs that it produces and sells in Europe utilize the techniques that PDL has patented.
PDL BioPharma Receives Letter from Genentech Relating to European Patents
This challenge is serious stuff for PDLI. Royalty payments from the sale of Genentech drugs in Europe accounted for 30% of the PDL's revenue in the first half of 2010. Obviously the loss of this revenue stream would be devastating for shareholders. So far Roche has not stated that it will pull the plug on royalty payments for these drugs, but investors are certainly assuming that will happen and they sold off the stock en masse. I'm neither a biotech expert nor a lawyer, but it seems to me as though PDL has a strong case here and that it will continue to receive royalty payments on drugs sold by Roche in Europe until a judge or an arbitrator says otherwise.
This isn't the first time that a drug company has contested its royalty payments to PDL, MedImmune did so as well back in 2009, and it might not be the last. Any increase in legal expenses as a result of these challenges will obviously eat into the revenue that can be distributed to shareholders. Conversely, a win in the company's pending trial against MedImmune, which will likely begin in early 2011, would be a windfall for PDI and increase the value of its stock.
I think that PDLI has a strong case against Genentech. If it wins, the company should easily be able to generate the minimal revenue growth that is necessary for investors to break even by just receiving dividend payments from the company through its patent expiration date using very conservative assumptions. Any increased sales of drugs using PDL's patents, that results in revenue growth above that is gravy.
Another potential issue with the company is management's desire to acquire other drug patents that would enable it to continue to receive royalty revenue after the "Queen" patents expire. This has the potential to be a good or a bad thing for shareholders. If PDL management makes an intelligent acquisition, obviously the continuation of revenue for the company instead of dissolution is a major plus for shareholders. On the other hand, a value-destroying acquisition would obviously hurt the above investment thesis and likely result in losses for shareholders.
The possibility of a buyout by a major pharma company or a hedge fund always exists if the company's stock remains cheap.
I am not yet comfortable enough with this situation to purchase shares in real life, but I have decided to go long PDLI in CAPS at around $5.60/share.
This will be an interesting case to follow. There's so many cool special situations in the biotech and pharma sectors, like wind-downs and distressed companies that I am trying to learn as much as possible about the industry.
I'd love to hear others' thoughts on this situation and whether they believe PDL will prevail in its dispute with Roche.