PDL BioPharma May Be at Fair Value
Credit Suisse notes that potential upside is already offset.
PDL BioPharma (PDLI: Nasdaq)
By Credit Suisse ($11.12, June 13, 2008)
WE ARE DOWNGRADING PDL BioPharma (ticker: PDLI) to Neutral from Outperform based on valuation as the stock has reached our fair-value estimate and price target of $11. We remind investors that PDL is currently executing on the separation of the royalty and the biotech pipeline assets, and we expect the two entities to be trading independently by year-end 2008.
We currently value the royalty piece at $1.3 billion before tax obligations; the analysis was presented in our research report of April 10. After applying the available net operating losses, we subject the royalties to full federal and state taxations. As a result, we derive the net present value of the royalties at $908 million after taxes. For the biotech pipeline, our $492 million enterprise value estimate is based on our probability-adjusted net present value model and a "comparable companies" analysis, also presented in our research report of April 10.
Although there could exist upside to our valuation of the royalties (for example, depending on how PDL securitizes the royalty steam, the effective tax rate may be lower than the full tax rates used in our model), we believe such potential upside on the valuation of the royalties is offset by our higher-than-consensus valuation of the biotech pipeline given the current market conditions. As a result, we believe our estimate of $11-$12 per share represents a fair value range for the sum of all the assets within the company currently, and therefore are downgrading PDL stock to Neutral.
-- Y. Katherine Xu, PhD
-- Michael Aberman, MD
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