PDL BioPharma, AxoGen Benefit From 'Royal' Agreement

| About: PDL BioPharma, (PDLI)

As the regenerative medicine sector becomes increasingly more competitive, larger med-tech and biotech companies are finding that investing in this sector can help bolster their top lines and make them more attractive investments.

Such is the case with PDL BioPharma (NASDAQ: PDLI) and AxoGen Inc. (NASDAQ:AXGN). They recently inked a $20.8 million deal that provides added value to their shareholders by allowing both of them to strengthen their balance sheets.

AxoGen has been carving out its place in the regenerative medicine space through its peripheral nerve injury products. It has grown a portfolio of products that are being used for peripheral nerve reconstruction and regeneration. They include the Avance® Nerve Graft, which is used to bridge nerve gaps that occur when the nerve is severed.

In fact, last week, St. Jude Medical Center in Alachua, Fla. used AxoGen's nerve graft product in a prostatectomy surgery to replace nerve bundles that had to be removed as part of the procedure. Prior to this procedure, AxoGen's nerve graft had been used in a surgery for a boy who'd severed nerves in his arm following an ATV rollover accident.

The Avance Nerve Graft was also used in a surgery on a six-month old whose brachial palexus nerve had been damaged during her birth. The surgery was performed at the Miami Children's Hospital. This was the first nerve repair surgery of its kind for the hospital.

Having followed companies in the regenerative medicine space, AxoGen has been a prominent player. Its products are clearly making a difference in the lives of many who suffer from nerve damaging injuries. As pointed out by Loewen, Ondaatje, McCutcheon (LOM), AxoGen is an emerging player in the field of regenerative medicine, which it estimates to be an annual $500 million U.S. market opportunity.

LOM pointed out that Axogen trades at a 201 EV/sales of 2.3X, which is a roughly 40% discount to its peers. I agree with the firm that this does not adequately reflect the growth of AxoGen's portfolio. LOM recently initiated coverage of AxoGen to buy with a 12-month target of $5. At the time of writing on Friday, the stock was trading 8% higher at $2.70. This was within its 52-week range of $2.06 and $4.

A handicap that has limited AxoGen's growth potential relates to sales and marketing. This brings me to my point about the importance of its agreement with PDL because it should help the company put more sales people on the ground to market its products. Specifically, AxoGen has entered into a revenue interest purchase agreement with PDL in which it received $20.8 million.

"As a result of the recent financing with PDL, we paid off all bank debt and eliminated the restrictive lender requirements," said AxoGen CEO Karen Zaderej. "This will allow us the flexibility to develop and expand our sales force and invest in significant marketing efforts."

While the agreement should pay off for AxoGen, partly in the form of it strengthening its sales force, it is equally important for PDL because it allows the company to continue focusing on intellectual property asset management. PDL could generate roughly $85 million from royalties based on their third quarter 2012 royalty revenue guidance. This would represent growth of 2% year over year.

PDL BioPharma touts its self as pioneering the humanization of monoclonal antibodies and, by doing so, it was able to discover a new generation of targeted treatments for cancer and immunologic diseases.

The royalty agreement has an eight year term and provides PDL with royalties based on AxoGen revenues. Minimum payments begin in the fourth quarter of 2014.

As more players enter the regenerative nerve space, I expect to see more companies follow in the footsteps of AxoGen and PDL BioPharma.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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