PDL Biopharma: Shorting Above $19 is a Safe Bet

A couple of firms commented on PDL Biopharma (NASDAQ:PDLI) after the company said on Tuesday that it will sell off all of its marketed medicines and warned its earnings would be significantly reduced in the near term. In addition to announcing a major strategic shift away from a focus on heart disease treatments, PDL said it terminated a phase 3 clinical trial of its experimental drug, Nuvion, for ulcerative colitis. PDL, which expressed surprise and disappointment over the Nuvion failure, said it decided to get out of the cardiovascular disease business and instead focus on discovery and development of medicines for cancer and immunological diseases:

- Deutsche Bank notes PDL shares reacted negatively to PDL's press release, the Board's weak response as to whether PDL is still potentially positioning for sale and if the Board truly believes reinvesting monies behind an early-stage pipeline given PDL's extremely poor track record is in fact the best strategy for maximizing shareholder value. DB continues to believe PDL commands unique scarcity takeout value particularly on current valuation given its state-of-the-art antibody technology know-how and manufacturing expertise and remains a major takeout target among multiple ex-U.S. and U.S. pharma and biotech players.

It remains critical for PDL leadership to continue proactively guiding this process to completion in order to offset accelerating stock weakness fueled by a lack of positive catalysts, and a weak repositioning strategy for PDL as an early-stage biotech re-start. While PDL plans an R&D meeting 11/07, a clear strategy has yet to be developed, in firm's view.

- CIBC is taking their rating to Sector Performer from Sector Outperformer saying key outstanding questions are when the assets will be divested, at what price, and how proceeds will be invested or returned to investors. Although execution of this plan is a risk, overall, they believe the reorganization increases the possibility that PDL is acquired.

PDLI shares slipped to ~$20 on the news, and based on the company's new fundamentals and a lack of near-term catalysts, they believe this is near fair value. Although a takeout would occur at a premium to this, they do not expect a deal before mid-2008.

- JP Morgan is downgrading the stock to Neutral from Overweight.

Notablecalls: Activist investor Third Point LLC had been urging the board for months to oust Chief Executive Mark McDade and a week ago they finally succeeded. But who would have known McDade was leaving behind all this.

If one assumes PDLI manages to sell off all of its marketed drugs + Ularitida (PII, CHF, $750 mln potential), I think it could bank about $600-$700 mln. That's about $5-$6 bucks per share.

I also think the royalty stream, coming from nine marketed mAbs is worth $1.8-$2 billion today (a 10x multiple to peak royalties of $450 million in 2013 and discounting back 5 years at 20%), which equates to about $15-$16 per share.

So together, that's roughly $20 per share.

Now, there's the scientific platform and a handful of mid-to-early stage compounds in the pipeline. I must say I have no idea how to value the platform as PDLI has had a really lousy development yield, spending twice as much as most peers to come up with workable compounds. Still, it's certainly THE thing potential acquirers want. So, the platform could be worth up to say $10 per share.

I'm giving zero value to the current pipeline as PDLI will need to burn through a lot of cash before anything interesting surfaces from there.

So, for a potential acquirer, PDLI could be worth up to say $30 per share. So maybe, just maybe, Third Point knew what they were doing after all. Though, I'm sure they are surprised by the Nuvion news.

The stock will get hit today and will trade below the $20 level. I think it could initially go below the $18 level and even $17 does not look far-fetched here. So, shorting it above $19 looks like a safe bet.

PDLI 1-yr chart