Merrill - different view
Attractive risk reward with planned PDL spinout
PDL’s eventful ‘07 included shareholder activism, departure of the CEO, pipeline
failures and worries about excessive R&D spending. But in ‘08, it has successfully
sold off its products and manufacturing plant, paid out a $4.25 per share dividend,
solidified its Board and announced in April plans to spin out its pipeline of phase l
and ll candidates as a separate (“New Co.”) by YE08, funded with $375mn, while
maintaining PDL as a royalty holding company (“Shell Co.”). We await more
details on the restructuring and our rating is out of consensus, but we continue to
like the risk reward at current levels. By our estimates, the stock reflects no value
for the spinout, providing a hypothetical call option on the pipeline. We estimate
the hypothetical upside/downside as $4-5 / $1-2. We reiterate our Buy rating.
Upside possibilities with lower spending, higher royalties
PDL plans to fund New Co. with $375mn in cash, with milestones, collaborative
revs. and/or pipeline success for the long-term. With $375mn plus a tax basis of
$200mn for assets, any valuation of New Co. >$575mn (once it starts trading)
would be a taxable gain. PDL initially estimated $375mn as sufficient for ~3 yrs of
expenses, but we believe cash burn will be much more disciplined. Also, there is
upside potential for “Shell Co.,” (requiring minimal expenses) as we only include
50% prob. adjusted estimates for Roche’s Actemra in RA, no ests. for Alexion’s
Soliris (in patent litigation) and no ests. for Wyeth’s Alzheimer’s antibody.
Stock at current levels reflects call option on pipeline
Our P.O. of $15 (reduced in May from $19 after the $4 dividend) is based on a
sum of the parts NPV model. We estimate the New Co. could be worth about $4-5
per share and the PDL Royalty Shell Co. about $10-11. Assuming $0 value for
New Co. (no pipeline success), downside is still limited in our view. |
