Merrill putting the best face on things. I took a position because it seems to me there is pressure on the BOD to repair the gaffe.
Investor reaction was palpable: Not another R&D company!
PDL’s stock dropped over 20% Wednesday on extremely high volume after the
company’s conference call concerning the intention to sell off the products
(Cardene, Retavase, IV Busulfex) and pipeline candidate ularitide, and the clinical
failure of Nuvion. Putting aside the visceral investor reaction to the conference call
itself and the failure of Nuvion, biotech investors clearly did not appreciate hearing
that a profitable mid-cap biotech company with product revenues and strong top
and bottom line growth is thinking about reverting to a smaller research and
development company. In our view, the simple message from PDL was (or should
have been): “anything and everything is on the table to enhance shareholder
value,” including sale of the company. Maintain Buy.
Possible first step toward selling the company?
We presume that PDL has potential buyers for the products and ularitide. But
once the product revenue is gone, will the royalty stream simply be used to fund
R&D projects? That scenario had investors running for the exits. But we expect
the recent announcement is just the first in a series, with sale of the company
being a potential endgame.
Goal is to maximize shareholder value
Whether buying ESP in particular was or was not a wise move at the time is
irrelevant in our view. The issue with PDL has been excessive R&D spending, or
rather, the lack of R&D yield, not the commercial franchise, which has grown
Cardene sales impressively. The products provide cash flow and investors clearly
did not want to hear that PDL is considering selling its commercial franchise to
become an R&D company. We presume the goal is to maximize shareholder
value, either by becoming an even more profitable biotech company or getting a
good price for sale of the company.
When smoke clears, stock is undervalued, maintain Buy
Rather than moving to the sidelines, we believe this is precisely the time to stay
involved with PDL. The stock stabilized at just under $19 on Thursday on heavy
volume, and separating the stock from investors’ reaction to the conference call,
this downturn presents an opportunity. PDL is an unfolding story with the stock
trading at just about its royalty stream, with more strategic developments to come. |
