PDL BioPharma (PDLI) is a very unique biotech company owns a portfolio of valuable patents that bring in royalties from licensed products. Genentech/Roche (RHHBY.PK) currently has 4 marketed drugs licensing PDLI's technology: Herceptin, Avastin, Lucentis and Xolair. PDLI collects royalties from the total world-wide sales of these successful drugs at rates ranging from 1% to 3%.
PDLI has several ways to enhance shareholder value; paying sizable “special” dividends, seeking new licenses or outright sell of the company. I personally think the last option may be the best for current shareholders, and there is a chance Genentech/Roche may pick this firm up. Here is my analysis why Genentech/Roche should do that.
Genentech/Roche pays PDLI substantial royalties
In the last several years, PDLI derived more than 70% of its revenue from Genentech/Roche products. In 2009 alone, Genentech/Roche paid PDLI more than $220M. Granted, $220M may not be much for a company with annual sale of ~$49B and net income of ~$8B. But still that’s roughly ~3% of its annual net profit which would have a significant impact on its EPS.
In 2009, Genentech/Roche paid ~$2.3B royalty expenses to third parties and the PDLI portion represents ~10%. Genentech/Roche also collected ~1.3B royalty income from other companies licensing its technologies. Buying PDLI would add ~$100M royalties PDLI collects from Elan (ELN) and Biogen (BIIB).
2006 | 2007 | 2008 | 2009 | |
Total Rev($M) | 187 | 225 | 294 | 318.2 |
RHHBY Rev ($M) | 160.5 | 176.4 | 212.4 | 227.4 |
RHHBY/Total % | 85% | 78% | 72% | 71% |
Future Genentech/Roche revenue estimates
Since PDLI's key patents will expire in 2014, it is expected to receive royalties until around 2015-16. In the last five years PDLI’s revenue had a CAGR of ~24%. For my calculation below, with a conservative CAGR of ~12% PDLI will be able to generate revenue of ~$2.7 billion with ~$1.8 billion from Genentech/Roche.
2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
Total Rev ($M) | ~350 | ~380 | ~420 | ~460 | ~510 | ~560 |
RHHBY Rev ($M) | ~240 | ~260 | ~290 | ~320 | ~350 | ~390 |
At time of writing, PDLI has a market cap of ~$700M with ~$500M in net debt. By paying a 50% premium over today’s price, it will cost Genentech/Roche ~1.5 billion, a saving of ~$300 million. Taking into the consideration that PDLI will generate ~$0.9 billion revenue from other licensees in the next 6 years; the real saving for Genentech/Roche would be ~1.2 billion.
Even paying a 100% premium, it would still save Genentech/Roche ~$800 million. That's a good chunk of money for any company.
Advantage of buyout vs. dividend payout to shareholders
As described in my earlier instablog, the total future dividend payout is roughly $8/share. But that will be spread out in the next 5-6 years. A buyout would generate a profit of ~$3-6/share as analyzed above. I certainly think this is the better way to go for current shareholders.
Potential opportunities and risks
PDLI has a highly-profitable business with some substantial upside potentials. The management is actively seeking new licensees, and some current licensees have late-stage product candidate may be approved fairly soon. These include Solanezumab and Bapineuzumab for Alzheimer’s disease developed by Eli Lilly (LLY), Johnson & Johnson and Pfizer (JNJ, PFE) respectively.
Management also indicates their willingness to sell the company, which will generate a better return for shareholders. Even without a near-term buyout, it is still a high-income-generating stock for the next 5-6 years. So in my opinion, the downside risk is really limited.
Disclosure: Author holds a long position in PDLI
