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PDL Biopharma (NASDAQ:PDLI) has been one of my favorite biotech companies over the last couple of years.

Unlike many biotechs that are essentially "betting the farm" on one or two unproven drugs, PDLI is built on the foundation of a strong, patented (patent runs to 2014) humanized antibody that brings in a steady royalty stream, and they use that royalty stream to fund development of their own in-house drug discovery programs.

Steady Revenue Stream, Just Like Big Pharma

This notion of using a steady revenue stream from other sources to pay for drug discovery and expensive clinical trials is not new, of course. The big pharmas all do it, and some other biotechs like Myriad Genetics (NASDAQ:MYGN), with its genetic test development business or ArQule (NASDAQ:ARQL), which provides outsourced chemistry work for other pharmas, do as well. But it's a little unusual among the big crop of exploratory biotech firms, most of which have no revenue to speak of. PDLI will bring in about $400-430 million in revenues this year, according to the company.

So PDLI is a pretty mature company compared to many, even if it hasn't yet broken through to reach the size or profitability of the huge biotechs like Amgen (NASDAQ:AMGN) or Genentech (DNA).

The revenue stream from their royalties looks very solid for the next several years, during which they aim to keep up a rate of 25% compound annual growth. Royalties have begun flowing from their latest Genentech licensee, Lucentis, and they continue to receive royalties from eight other drugs, including potential (or realized) blockbusters Avastin, Tysabri and Herceptin. More than 75 other potential royalty-producing drugs are in development, with eight of them in Phase 3 trials at the moment, so that aspect of the business looks just fine.

"Intact... But Dented"
But PDLI has hit a spot of trouble this year with their own drugs, and no matter how much the royalty stream helps with their cash flow, the success of this company will rely on getting some significant sales from several of their own drugs over the coming decade.

Their growth targets, present goals and their wide array of clinical programs remain, in the words of CEO Marc McDade from a recent presentation at a biotech investor conference, "intact ... [but] dented in a few ways." The outlook now differs significantly from just a few months ago, at the first quarter conference call, when optimism was higher and pivotal data was expected for several compounds within the year.

The long term goals are in fairly good shape; they aim to launch three drugs by 2010. At least two of them will be internally developed products, and there are several candidates that could make that goal reach fruition.

But disappointing delays and clinical failures are wreaking havoc with their short term goals, and with their image (and thus the stock price over this summer). PDLI aimed to have three clinical programs in pivotal studies by the end of this year, and that's not going to happen.

The clinical failures have not been catastrophic. They failed to reach endpoints on two studies recently, including Terlipressin in Phase 3, and following their meeting with the FDA, it's quite possible Terlipressin won't move forward. Terlipressin was an orphan drug for a tiny market, so it's medically disappointing but financially, it is probably not that significant that this program is in trouble.

So should we be worried about these recent failures, or that some of their other programs are moving through the clinic a little more slowly than expected?

Well, PDLI is not going to go out of business in the next few months because of this bad news, but there may be cause for concern.

Internal Blockbusters Needed
No matter how much we focus on PDL Biopharma's cash flow from blockbuster drugs like Herceptin, the fact remains that, for them to reach a significant level of profitability, they're going to need some successful drug products of their own to reach the marketplace. For all intents and purposes, at least one of those successes, and probably two, will need to come from the big four candidates: Nuvion, Ularitide, Daclizumab and M200, the most promising clinical progams in PDLI's pipeline.

PDLI does have a sales force, and they do have three drugs on the market, all of which were acquired when they bought out ESP Pharma. The biggest of these is Cardene I.V. for hypertension, and they've also bought the rights to oral Cardene to strengthen their position. Retavase and IVBusulfex are smaller but also profitable in some very specific acute care sectors.

But what they're really hoping is these three drugs pave the way for their other, bigger compounds. So what's the status of their most promising drugs?

Nuvion: Promising drug for a severe version of end stage ulcerative colitis, and it's generally considered the most advanced drug in PDL's pipeline. It is designed to prevent or delay colonectomies, which happen about 70,000 times a year in this indication, and that's got to be good news for folks who are otherwise forced to have very serious surgery and live with a colostomy bag.

They have a hybrid Phase 2/3 study for Nuvion in the works right now, but it will be well into the spring of next year before there is a safety decision that could allow them to start even the phase 2 component, and that's a longer wait than I expected. Other supportive or retreatment trials under way, but it's going to be at least a year before we hear anything.

Ularitide: Drug that came from the ESP Pharma acquisition, and one that aims at a much larger patient population; two million people a year enter hospitals with acute decompensated heart failure. They've had positive results in phase 2 in Europe, but are way behind in US clinical testing of this drug. They're starting the first of two phase 3 trials by the end of this year in Europe, but are just now starting Phase 1 in the US for dosing, and they expect the US to end up about a year behind Europe.

Daclizumab: This drug has hit some hiccups recently. Roche has terminated the collaboration for this drug for asthma so PDL Biopharma is waiting to see if there is a new partner and won't move forward without one. Thankfully, this drug is promising for several different indications, so two phase 2 trials are underway now. They expect to see some data in about a year for Daclizumab in transplant maintenance (also partnered with Roche) and for Multiple Sclerosis (with Biogen Idec).

M200 (also called Volociximab): is a cancer antibody that has been surrounded by optimistic buzz for a while. This cancer antibody has had several phase II studies, also in partnership with Biogen Idec, trying to determine how to move forward with clinical testing. It has a similar mechanism to Avastin, though the target and performance differ, and there was some hope (at least from me) that this would show some early breakthrough results. So far, the results are very preliminary and someone like me who's not an expert on pharmacology should probably ignore them, but I think the fact that no notable news came out of the first round of exploratory testing this summer is disappointing.

It looks like cancer buzz at PDL Biopharma may be migrating to its next IND candidate, a new anti-tumor compound that's expected to begin human trials by the end of the year, though there's certainly every possibility that M200 will come through as well.

PDL Biopharma has a lot of things going for them: they're operating cash flow positive for the first time this year, the royalty stream continues to grow nicely and they're doing a good job selling their current (minor) drugs to hospitals. Nuvion and Ularitide are aimed at launch in the next five years, keep your fingers crossed. And a manufacturing facility is already gearing up for Nuvion and Daclizumab production.

Down But Not Out
But PDLI's luster seems a bit dimmer these days. I think it's just that the summer was filled with tepid or disappointing clinical results for several relatively unimportant products, and that the negative headlines ("Trial Failed to Meet Endpoints," "Development Partnership Cancelled"), along with the incremental delays across their bigger programs, are going to define the image of PDLI in the marketplace until they're able to release some good clinical news ... hopefully, within the next year.

The last time PDLI's stock looked troubled, back in the Spring of 2005, it was a great buying opportunity, as fears over Avastin's problems were taken way too much to heart by PDLI investors. I wrote about PDLI for the first time about a year ago, detailing my purchases both before and after that dip in the share price, and my average cost today stands at about $19, right where we are now.

More recently, back in May, disappointing earnings and guidance that reflected some of these delays in drug development cut the shares by 30%, again, which is how we get to the current price after a year of highs in the $30s and lows in the low teens.

I'm not buying any more PDLI at these prices, but I'll certainly plan to hold them for the long term, and if bad news that's unrelated to Nuvion, Ularitide or Daclizumab comes out and brings the shares down further, I may be tempted to add to my position. I'm worried, but I'm trying to put that emotion aside because I think I'm worried about things that aren't that significant to PDL's long term future.

Disclosure: In addition to PDLI shares, I own shares of Myriad Genetics (MYGN).

PDLI 1-yr chart:

Source: PDL Biopharma: Troubled Summer, But Holding On