What Does Seth Klarman See in Facet Biotech?

Jun. 8.09 | About: Facet Biotech (FACT)

By Zain Griffith

In the May issue of Portfolio Manager's Review - "The Superinvestor Issue," our team highlighted 100 companies owned by well respected investors and profiled 30 of them.

One company of particular interest was Facet Biotech (NASDAQ: FACT), currently owned by Seth Klarman of The Baupost Group.

Background:

As discussed in the write-up, FACT was spun-off from PDL Biopharma (NASDAQ: PDLI) in December 08. FACT, post-spin, consists of PDLI's former R&D operations, a product development pipeline that includes four drugs (two in Phase II of development and two in Phase I), and a pile of cash. PDLI contributed $405 million in cash or $17 per share to FACT at the time of the spin-off.

Why is Seth Klarman interested in a biotechnology/pharmaceutical company?

Mr. Klarman recently discussed his investment thesis for FACT in this presentation. If you have not seen the video, I highly encourage you to watch it--at least twice. To hear the thesis, fast-forward 26 minutes and 30 seconds into the presentation.

In the video, Klarman stated that FACT "has about $16-$17 per share in cash, so you could clearly liquidate that, stop all discovery activities and mail out $10-$14 per share back to the holders."

FACT is a classic Ben Graham "net net." At the time Klarman mentioned FACT in the video (in March), the stock had traded down to around $6 per share--a very substantial discount to cash.

Klarman always looks for investments with downside protection. In this particular case, the cash provided the downside protection and potential near term upside was present in the form of a catalyst. That catalyst was a group of dissident shareholders led by Dr. Roderick Wong, which wanted the company to pay a cash dividend to shareholders of $15 per share and to sell its assets.

Even though on May 4, 2009, Dr. Wong ended up withdrawing his slate of nominees, FACT's stock price has increased by over 50%, closing on June 5 at $10.73 per share.

Is FACT still a good investment today?

FACT is still trading at a discount to cash, but the margin of safety has clearly diminished. During 1Q09, FACT burned through $20 million of cash--leaving net cash per share of about $14.50. Since the company does not appear to be liquidating any time soon, an investor who purchases shares today must get comfortable with owning a cash burning biotech company.

An investor that purchases shares at the current price is essentially receiving at least a years' worth of R&D expenses and the company's current drug development pipeline for free. The pipeline could have some value and could be evaluated based on its optionality.

Disclosure: No position.