Write-up on PDLI BioPharma, courtesy of Daniel Jones. Daniel is the editor of a stock and options recommendations newsletter, optionsnotions.com.
PDL BioPharma: Take the LEAPS
As I pen this newsletter, I’m already seeing the Dow Industrials Index dropping by 160 points, despite the fact that oil is actually down over $1.00 per barrel today.
Markets seem to be detaching from the recent predictable cause-and-effect of higher oil prices = lower stock prices and vice versa. The focus is shifting…but the big question is: To what is that focus going to be on next? PIMCO’s Bill Gross had an interesting June Newsletter opining on the "real" rate of global inflation vs. what the US Domestic CPI and PPI measures are showing. His very interesting observation was the US Government, which reports the statistics of CPI and PPI has been monkeying with how those indexes are measured for so long, and in such measure, that they really don’t reliably report the actual "real" rate of inflation any more. Bill’s group has a gigantic vested interest in knowing what the real rate of inflation is on a global scale, and the fact that the rest of the world is reporting 6+% inflation rates while we in the US still are being fed data that show benign rates – well, let’s just say that what we’re being fed is pretty good fertilizer.
Technical Analysis
The chart above shows PDLI for the last six months. The stock had a massive U-turn at the $6 level, and then has actively risen as management has pursued its break-up into various pieces. The Relative Strength Index [RSI] and Moving Average Convergence / Divergence [MACD] stochastic lines are moving into the positive. We think the sum-of-the-parts here is worth more than $10, so we’d like to own LEAPS on the name.
Fundamental Data
- Current Price: $10.17
- Shares Outstanding: 119.3 million
- Market Cap: $1.2 billion
- Forward Price / Earnings (avg. Est): 9.2x
- PEG Ratio (5 Year Expected): 0.74x
- Price / Book: 2.5x
PDL, Inc – what a dry name! It’s the old Protein Design Labs, which we think had a lot more pizzazz to it. In case you’ve forgotten, Protein Design Labs was responsible for creating "Avastin", amongst many other engineered drugs, which has proven to be one of the most useful anti-cancer drugs on the market. PDLI recently (late 2007) decided to basically split itself up into several pieces and sell itself, thus realizing what its directors and shareholders believed would be a significant premium to its then-prevalent share price. As a result of the sales of a few of its patented drugs, the company paid the first special dividend of over $4 per share to holders last month. There are more spin-offs and special dividends to come here as the company completes this effort.
The Motley Fool article referenced above reviews the discounted value of PDLI’s royalty streams that they are packaging up and selling. In their estimation, the value of the future drug payments from various companies is going to be over $1.4 billion.
What’s happening with those royalties to realize their value today? Specifically in April, PDLi announced that it would distribute royalty revenue that the firm receives on drugs from companies like Genentech (NYSE: DNA), AstraZeneca (NYSE: AZN), and Wyeth (NYSE: WYE), in that process, create a new publicly traded stock for PDLI Stockholders. The Company also revealed that it would distribute almost all of the revenue it receives from these royalties as dividends to shareholders of the new spinoff.
The Fool article notes that these royalties aren’t infinite; they are going to come to an end within the next five to six years, around 2013 or 2014, when PDL’s existing patents on the manufacture of humanized monoclonal antibodies expire. There may be concern for the value of that $1.4 billion mentioned above, as some of the company’s royalties are coming in lower than expected, however most of the royalty-generating drugs are still growing quite nicely — Genentech’s Avastin experienced year-over-year sales growth of 13% in the first quarter, and the relaunch of Biogen Idec’s (Nasdaq: BIIB) and Elan’s (NYSE: ELN) Tysabri seems to be successful. New compounds in PDLI’s pipeline ike Cimzia, a treatment for Crohn’s disease have also recently been approved by the FDA, and they’ll soon add to PDL’s royalty revenue as well.
Overall, In 2008’s first quarter, PDLI’s royalty revenue grew at a rate of just under 3% Y-O-Y, and for next year PDLI management believes they will exceed an 8% growth rate.
Adding to the "sum of the parts" play here, when PDLI further breaks itself apart later this year, investors will also get a stake in PDLI’s remaining drug pipeline assets. Although many of these drugs are in the early stages of formulation and approval, you are effectively getting a collection of drug candidates that may or may not pay off for free.
Important note: The usual 100 shares of stock of PDLI represented by one option contract has been adjusted for the purposes of that $4.25 per share special dividend mentioned above. Accordingly, what you are buying in the recommendation below is the right to buy 100 shares of PDLI, plus you will receive a $425 cash payment representing that special dividend.
Investment Recommendation
We recommend that investors buy PDLI’s LEAPS, specifically the January 2010 expiration $10 strike price LEAP, which includes the $425 dividend. The symbol is "YOJAB". Current bid / ask for those LEAPs is $4.50 at $5.20, so we might look to be at the $5 level today, June 2, 2008. We would look to hold this trade to expiration – as PDLI’s various spin-offs occur, holders of these LEAPS will benefit, and the value represented by the $425 special dividend, although not paid.
Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.
Disclosure: Analyst has no position in PDLI stock or PDLI options.
