Miami, FL – August 9, 2018 (EmergingGrowth.com NewsWire) — EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on PDL Biopharma (NASDAQ: PDLI)
PDL BioPharma (NASDAQ: PDLI) was once a rising biotechnology company with strong patent portfolio that translates to consistent net profit and dividends. After their lucrative patents have expired, the company lost more than 80% of its market capitalization as it struggled to return to historical profit levels. Over the 10-year period, PDLI shares have drastically under performed relative to its peer group.
To address the lingering issue of plummeting profits, management decided to transition PDLI from a pure-play biotechnology firm to a healthcare investment company. This three-pronged strategy would involve acquiring private-equity like healthcare investments, seeking royalty income stream and financing life science companies.
“PDL BioPharma, the Deal-Maker”
One of its key equity investments is Noden Pharma, a global specialty pharmaceutical company acquired on July 2016. Prior to acquisition, Noden purchased exclusive worldwide rights from NOVARTIS AG (NYSE: NVS) to manufacture and sell hypertension drugs under the brand names Tekturna and Rasilez. There have been positive updates from Noden Pharma recently, including securing an agreement with Lee Pharmaceutical Holdings to license these hypertension drugs in China, Hong Kong, Macau and Taiwan as well as signing a distribution agreement with Orphan Pharma in Japan.
Separately in May 2017, PDLI pursued the acquisition of a medical device company called LENSAR, a leader in cataract laser surgery. As a stand-alone company, LENSAR is keen on acquiring medical device related businesses to beef up its product lines – the latest one was the acquisition of the laser business unit of Precision Eye Services.
As a whole, these equity investments have realized earnings accretive to PDLI, contributing to a sizable chunk of revenues in 2017. In fact, this allowed PDLI to reduce its reliance on royalties related to its legacy patents. Given these developments, it looks reasonable to assume that PDLI will pursue more equity investments in their portfolio.
However, it is not easy to dismiss the staggering cash returns of $587 million, or rate of return of 15.9% from their legacy royalties and financing transactions. Consequently, the lack of private equity opportunities implies looking at royalty assets to deploy its significant cash hoard. Case in point, they have acquired royalty rights on Type 2 diabetes products from Depomed (NASDAQ: DEPO) in 2013 due to a dearth of attractive private equity investments.
“Buying Growth Optionality for Free”
PDLI’s assets are mainly net cash, royalties and notes receivable from their financing deals. Based on the company’s March 2018 filings, these assets have aggregate book value of $698 million, or $4.60 per share. Our back of the envelope calculation suggests the current price represents a 55% discount from the calculated value.
These valuations are justified only if the company is undergoing a liquidation process. It appears that investors have written off the fact that PDLI is already generating sufficient free cash flow. On a no-growth scenario, free cash flow is projected at $39 million per year, or a free cash flow yield of 10% based on the market capitalization. These yield rates are mouth-watering from the viewpoint of a Risk-free Treasury bond investor.
The catch, however is that a substantial valuation discount would indicate investors’ lack of confidence in the company to generate consistent profits. In this case, SevenSaoi Capital took notice and started accumulating PLDI shares. The investment firm demanded management to deploy the company’s cash hoard of $400 million for profitable investments and generate value from their current investments.
It is early to tell whether management could address improving shareholder returns, although an activist investor can be the share price catalyst. At this point, enterprising investors are buying the stock for almost half of the liquidation value of its assets, while getting the growth optionality at no cost.
EmergingGrowth.com is a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies. Through its evolution, EmergingGrowth.com found a niche in identifying companies that can be overlooked by the markets due to, among other reasons, trading price or market capitalization. We look for strong management, innovation, strategy, execution, and the overall potential for long- term growth. Aside from being a trusted resource for the Emerging Growth info-seekers, we are well known for discovering undervalued companies and bringing them to the attention of the investment community. Through our parent Company, we also have the ability to facilitate road shows to present your products and services to the most influential investment banks in the space.