Member Q&A: PDL BioPharma

Q) PDL BioPharma (PDLI, $6.49, 0.12) has fallen since paying out a special dividend. Do you have any thoughts on the name?

A) PDL holds antibody humanization patents and royalty assets. The firm has 7 patents: 5 in the U.S. and 2 in Europe. The European patents expire this month, but PDL is extending them for Xolair, Avastin, Tysabri, and Lucentis until December 2014, and for Zenapax, Herceptin, and Synagis until March 13th.

It has license agreements with numerous biotechnology and pharmaceutical companies, but Genentech was by far its biggest, representing 77% of 2008 revenues. Its license with Genentech (which has been acquired by Swiss drug giant Roche) covers 5 products: Avastin, Herceptin, Xolair, Raptiva, and Lucentis. The company also has license agreements with MedImmune (now part of AstraZeneca), Elan (ELN, $6.30, 0.03), Wyeth (now part of Pfizer), and Chugai Pharmaceutical.

PDL issued Q4 revenue guidance earlier this month. It expects to generate revenue of $57 million versus $69 million a year ago. The year-ago quarter included one of two installment payments from Alexion Pharmaceuticals for $12.5 million and a $1.8 million one-time payment from Genentech, so revenue will grow by about 4% excluding those items. However, the forecast was below the $60.6 million Wall Street consensus at the time.

The company will see higher royalty revenue from Genentech’s Avastin and Lucentis and Elan’s Tysabri due to higher sales of those drugs. However, it will see lower royalties from MedImmune’s Synagis, as drug sales fell -25% last quarter. It will also see lower royalties from Herceptin due to a change in the sales mix of U.S. versus non-U.S. manufactured Herceptin.

BMR Take: PDL provides relatively low-risk exposure to a portfolio of very big yet somewhat controversial drugs. It derives nice cash flow on royalties from existing drugs that it then tends to distribute to shareholders in the form of special dividends. Some of the drugs, however, have run into some problems with side effects, and one was suspended. We think the stock looks okay on a pullback and that it will generate pretty steady revenue growth the next few years. However, we’re not in love with the stock given that its patents will expire in 2014. In a way, the company is sort of like a U.S. royalty trust in that one day the well will just go dry. As such, we wouldn’t ever expect a big return past the special dividends.

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Tags: ELN, PDLI