There have been a host of articles over the past year that have talked about PDL BioPharma's (NASDAQ:PDLI) valuation, cash on hand, and possible acquisition of Neos. I'll leave it to astute readers to explore some of the basics that are covered in those articles and suffice to share a general summary of what other authors have already covered: PDL BioPharma is an undervalued company with significant cash on hand that has recently failed to secure the purchase of another company, Neos. They describe themselves as a "publicly traded private equity shop" and have a 15.9% internal rate of return on their historical debt and royalty deals. They are pursuing a new strategy of acquiring specialty pharma products and companies.
Again, all this and much more can be gleaned from many of the other articles written about PDLI. So I'll spare you the battering of more of the same information.
Instead, I wanted to write about the ongoing litigation between PDLI and Wellstat and the possibility of a judgment awarding PDLI up to $145m to add to their already substantial cash position of $532m. The origin of the case comes from a $40m loan PDLI made to Wellstat in 2012. Wellstat nearly immediately defaulted. Despite PDLI working with Wellstat to try and renegotiate multiple times, Wellstat continued to default again and again on the loan. After years of defaulting PDLI took Wellstat and the loan guarantors to court in 2015, at which time none of the loan had been paid back.
So to start, we have a $40m loan which has never been paid with a 5% interest rate originally and a higher interest rate in the instance of default according to PDLI's filings. PDLI motioned for summary judgment against Wellstat and the loan guarantors at an amount of $83.969m. Judge Eileen Bransten granted this motion in July 2016 and someone was to be appointed to determine the exact amount owed to PDLI, but the debt was acknowledged by the court. This was appealed immediately and this decision was overturned in February 2017 on procedural grounds and sent back to Judge Bransten where the case is ongoing.
Now, I'm not a lawyer so I won't presume to try and explain the nuances of all that happened. What I will say is that a summary judgment allows for a case to be decided without a full trial. The appellate court decided that this wasn't appropriate in this instance and so sent it back to Judge Bransten to preside over. At the center of the case is whether or not the loan guaranties are still at play and Judge Bransten evaluated these before she granted the original summary judgment and decided they were. Even after the appeal we can see in transcripts that Judge Bransten suggests that her original opinion about the guaranties remains unchanged even if the procedure was not appropriate. In her own words to the defense lawyers on March 2017 (page 31):
"The motion court also had to construe the forbearance agreement, but guess what? I did make that analysis. That's the reason why I've got to sit down and look at both this and my decision because my understanding of what the First Department (the appellate court) did is they said you can't do that under a summary judgment in lieu of complaint motion. That you can't do, but your decision as it concerns, again, guaranties and my analysis in terms of the forbearance agreement all of which I have done was affirmed."
And just last month Judge Bransted said this (pg 25):
"But, you see, then the Appellate Division went on to say that because I had to look at much more than just the note itself and I had to go into ancillary documents to support the note et cetera, because of that they denied your right to a motion for summary judgment in lieu of a complaint. They remanded it back to me, which was nice of them. They could have remanded it back to somebody else. So they remanded it back to me in order to conduct proper discovery and go through the regular motions for a regular case. Then, of course, at the end there will be a filing, one day, hopefully, for a note of issue. And guess what? At that point you will have a right for a summary judgment motion. And who knows? You may prevail on that."
Again, I'm not a lawyer so take that into consideration with my analysis, but it seems pretty clear to me that the judge is unlikely to decide that the guaranties are not in effect unless some new extraordinary evidence comes into play. Judge Bransted has highlighted her desire to have this case decided by the end of this year because, as she snarkily states, "this is my last year, you know, constitutionally that happens. I don't agree with the constitution, but what could I do?" She goes on to state, "I don't like leaving something as important as PDL to somebody else."
The course of action that seems likely is that a note of issue will be submitted, then a motion for summary judgment will be requested by PDLI again, and finally the court will acknowledge the debt and have someone appointed to determine the exact amount owed. The most recent number I could find that PDLI is demanding is $145m as of September 2017 (page 3). And in that same document it is highlighted that the expected note of issue date will be March 30th (page 28).
At current, PDLI carries the "Wellstat Diagnostics Note Receivable" at $50.19m. In their most recent 10-Q PDLI stated "the Company believes the value of the collateral securing Wellstat Diagnostics’ obligations exceeds the carrying value of the asset and is sufficient to enable the Company to recover the current carrying value of $50.2 million." The real question is what is the difference between the carrying value and the amount they will be able to receive through the case?
Best-case scenario is the difference between the amount demanded and the carrying value: 145m - 50.2m = $94.8m. To put that in perspective, that's equivalent to $0.60 per share (using 154m as share count) for a stock trading around $2.45. But of course, this is the best-case scenario. If we take a much more conservative view and say they are awarded half the amount demanded we get: 72.5m - 50.2m = $22.3m which is $0.14 per share. And keep in mind that this is like a nice bonus to what the company already has been doing.
There's also a question of whether or not the defendants have the money at all to pay back the loan. One of the guarantors involved is Samuel Wohlstadter, a venture capitalist who has been involved in numerous companies over the years including helping to found Amgen (AMGN). I haven't done extensive research on his net worth, but I've done enough to suggest he has the money. A company Wohlstadter founded, BioVeris Corp., was sold in 2007 and as a large shareholder he received around $113m in this deal. That article also mentions another sale that Wohlstadter was involved with in 2003 where Igen was sold to Roche for $47.25 per share and one share of a newly formed company. The number I'm seeing reported for Wohlstadter's ownership at the time is 4,568,937 shares which translates to $216m plus the new company's shares. While these are old deals I think it is unlikely that Wohlstadter has been peddling away his money. Likely, he's been growing his value.
All in all, my guess is that the court case will go in PDLI's favor, that the guaranties included in the loan will compensate beyond the PDLI's current carrying value, and that all of this will be decided by the end of the year. And all of this is just a nice value add to an already undervalued company with management that has been growing book value of the company for over five years.
Just one more reason to take a look.
