PDL Biopharma (PDLI) – Liquidation – 25% Upside

Current Price: $3.32

Offer Price: $4.15

Upside: 25%

Expected Timeline: end of 2020

This idea was shared by Brian.

 

PDLI has been a public company for nearly 30 years, with the stock essentially flat following the 3 decades. Following a strategic review in the fall of 2019, and after activists joined the board in February 2020, PDLI announced plans to liquidate on March 11, 2020, targeting dissolution by the end of 2020. The company is also open to a full company sale should such a path maximize shareholder returns. As with many biopharma companies, many legacy shareholders are not the types who are dumpster diving in micro-cap liquidations. Our experience has been that many such situations, particularly in pharma, can result in indifference thus and indiscriminate selling by legacy growth-focused pharma investors.

PDL filed their initial liquidation proxy and put out a range of $3-$6/share in total distributions. This is an unusually wide range, we think largely because of uncertainty around the royalty portfolio as well as the fact that some of their smaller investments are private or illiquid. That said, management has in calls expressed confidence in returning at least book value, which was $4.68/share at 1Q20 ($4.09 adjusted for Evofem shares already distributed).

PDL has thus far moved quickly. On May 21, they distributed out their 13.3 mil shares of EVFM. Shareholders received shares worth about $0.58 per PDLI share on that date. PDL also owns 3.3 mil EVFM warrants struck at $6.38.

PDL's other assets are as follows:

  • Cash $0.97/share: PDL had $112 mil, net of the remaining convertible debt, at 1Q20.
  • Royalty portfolio $2.28/share: This is by far the largest piece of PDL. PDL receives royalties from 5 companies, the largest of which is from Assertio, the former Depomed. PDL received $79 milion in payments in 2019, up slightly from 2018. PDL valued these at $262 million at 1Q20, or around $2.28/share.
  • Notes Receivable $0.43/share: PDl has $52 mil in notes receivable, most of which is in escrow and we have high confidence in coming back to PDL relatively soon.
  • Lensar $0.3-$0.6/share: This is primarily a laser/technology for cataract surgery. Covid has resulted in most elective surgeries being delayed. However, something like cataracts, as opposed to Lasik or plastic surgery, is more likely to be deferred than dropped. Lensar has probably the widest range of potential values. This could be an attractive tuck-in acquisition for a number of buyers. Was on a run rate of $35 mil in revenue at the end of 2019, and had an in process next gen technology targeting commerical launch in 2022. We assume $0.3-$0.6/share based on 1x-2x sales, but this could be much higher.
  • Noden $0.43/share: The largest piece of this is Tekturna, a drug which recently went generic but for which Noden retains 68% market share. This generated $3.7 mil in EBIT in the first quarter and the company also disclosed that the division has $21 mil in cash as part of the held for sale assets. We figure this is worth $50 million or 43 cents per share.
  • Alphaeon $0.05/share: The company owns 1.7 mil shares of Alphaeon, a private company which PDL valued at $6.6 mil at YE19 or 5 cents per PDL share. Alphaeon itself has a number of assets including 8.7 mil shares of Evolus which they are distributing out per a 1/10/20 separation announcement.

PDL had $50 mil in accrued liabilities at 1Q20, net of the notes payable (already deducted above, net of cash) and liabilities held for sale or $0.43/share.

The net of all of this comes to a value of between $4.03/share and $4.28/share. The midpoint of this would be 30% upside from current prices, which allows both for a margin of safety should proceeds disappoint, and upside should the company match base-case expectations.

PDLI was aggressively repurchasing shares in late 2019 and apparently up until the EVFM distribution in the mid $3s (around $2.90 after adjusting for EVFM distribution). The disclosed distribution ratio indicates that PDL has continued to repurchase shares, and that shares outstanding are now 115 million, allowing for more per share value for the residual assets. This also speaks to management's expectations about monetization.

 

37 COMMENTS

  1. dt

    Thank you for interesting idea. Couple questions:

    – ‘put out a range of $3-$6/share’ – was there any breakdown on this from management and what is the largest driver behind the difference on low-high ends?
    – Management owns 11% of stock – are they also incentivised in some other way to see speedy liquidation with max shareholder value?
    – Any color on Engine Capital and their previous track record in liquidations? Also Engine owned 5.3% at the time of their 13D and in the latest proxy they are not among the 5%+ owners, even-though company has been reducing total share count. Any concerns here?
    – What do you estimate for final liquidation expenses – or is that a negligible amount?
    – Any tax leakage expected on asset sales?
    – VIC has comment on Assertio/Glumetza which might affect valuation (see #10 here https://www.valueinvestorsclub.com/idea/PDL_BIOPHARMA_INC/8529712412#messages). Do you know if this has been sorted out already?
    – Is the end of 2020 timeline still realistic? (maybe from your experience on other pharma liquidations). There seems to be quite a few assets to be sold. I can see that investment banks are already working on this, but was there any info in the proxy regarding interest in PDLI assets from third parties?

    1. Brian

      -On the range-This may sound general and vague, but in my experience management’s tend to sandbag with regard to liquidation ranges, and they have every incentive to underpromise and over-deliver, particularly with regard to range guidance. They were not specific in outlining ranges of specific assets within that range. The low end of that range, however, would imply very draconian assumptions-a huge writedown for the royalty portfolio, and little in proceeds for Lensar and Noden, given that we got 60-70 cents for EVFM (assuming one didn’t hold the shares until this week), plus the relatively stable values of the cash and receivables. The royalty portfolio in particular has been stable, and is generating large cash flows which are relatively short-tailed on drugs which have had stable revenues.
      -Engine Capital-I’m not very familiar with the firm but they were instrumental in pushing the company to liquidate. They noted in their amended D that:
      ” The sale of Shares reported herein was undertaken to effectuate a rebalancing of the Reporting Persons’ portfolio in light of recent market volatility and the appreciation in the Issuer’s stock price since the Reporting Persons’ investment was made in the Issuer.” Their timing in hindsight was less than ideal as PDL has provided a total return of around 45% including the value of EVFM at the time of spin-off since this filing: https://www.sec.gov/Archives/edgar/data/882104/000092189520000701/sc13da209488032_03102020.htm
      -The company accrued all expected liquidation expenses in 1Q, taking a large charge, and at present it’s about $50 mil, including severance, selling expenses, stock comp, etc. I included that as an offset in my appraisal/range
      -On tax, the company has substantial NOLs that should shield any gains on sale, however there are open examinations at the Federal level and from California, and risk of potential ownership change which could limit NOL usage. Their book value is substantially higher than the current price, so gains would be relative to their carrying values. I don’t see a major risk, and the CARES act offers the potential for them to seek refunds on taxes paid in 2017-2018 due to the 5 year lookback, which could provide additional upside.
      -On the Glumetza note, the class action covers the period from 2012-2016, after which agreements allowed authorized generics to hit the market. Royalties were strong in 2019 and in 1Q20 saw a small increase year over year, so I think the class action covers pricing issues from years back.
      -I think in light of Covid and such it will very likely stretch beyond 2020. Odds are that the company suspends trading before the end of 2020, and possibly moves to a liquidation trust or other vehicle. I would expect that they file formal liquidation and make a substantial distribution this year.

  2. Writser

    The receivables from the notes are in escrow? I thought the majority of the receivables had to be clawed back from Wellstat in a bankruptcy proceeding that has been dragging on for 6 years already. Have I missed recent developments in the proceedings? What makes you have ‘high confidence’ in a complete recovery?

  3. Brian

    The wellstat portion, which is the substantial majority of the notes receivable ($50.2 mil +): “the Company believes the value of the collateral securing Wellstat Diagnostics’ obligations exceeds the carrying value of the asset and is sufficient to enable the Company to recover the current carrying value of $50.2 million”, this following the September 2019 judgment (from 2019 10-k), and NY denying the defendants appeal.

    PDL also noted a couple of additional assets in their proxy filed 6/5 after the close which frankly I’d been unaware of. The Eli Lilly drug is binary, uncertain and longer-tailed, but could have substantial value if the drug succeeded:

    •amounts received in connection with our agreement with a counterparty pursuant to which we sold the remaining assets of DFM, LLC, to which we are entitled to a single-digit percentage of any net final award in connection with its monetization process using certain intangible assets included in the sale;

    •amounts received from a royalty based on a “know-how” license for technology provided in the design of solanezumab, an Eli Lilly-licensed humanized monoclonal antibody being tested in a study of older individuals who may be at risk of memory loss and cognitive decline due to Alzheimer’s disease. The 2% royalty on net sales is payable for 12.5 years after the product’s first commercial sale, and is currently in ongoing clinical studies with Phase 3 testing results expected in July of 2022; and

  4. Brian

    PDLI has traded down since this writeup and IMO nothing has changed in terms of the thesis.

    Royalty Pharma PLC, a purchaser of medical royalties, went public 6/18/20 and the stock has nearly doubled since then, to $54. Whether or not RPRX is a bidder for PDLIs patent portfolio, it speaks well of the value of their royalty portfolio that RPRX has received such a positive market response.

    PDLI now offers 37% upside to the mid-point I’d outlined, and 79% upside to the top of the company’s adjusted range (~ $5.40/shr).

  5. Brian

    PDLI just put out a proxy to authorize the dissolution.

    Notable that they’ve continued repurchasing shares, buying in another ~ 1% between May 15 and June 19th, after buying ~ 7% of outstanding between 2/29 and May 15th.

  6. Ilja

    Shareholder’s meeting to approve the dissolution of the company is set for the 19th of August.

  7. Brian

    Yes Noden was slightly light but a decent price all things considered. It’s a long payment period which obviously renders the liquidation period longer unless they sold the rest of the company, or everything ex-Lensar. It’s also notable that most of the cash in discontinued ops ($21 mil) was attributable to Noden, so one would figure that gets distributed out before closing. I wish the co had been more specific, but we relayed to mgmt that we’d like for them to address it when announcing 2Q.

    I was assuming a valuation of around 2x revenue for Lensar. It’s hard to arrive at an estimate of how the market will potentially value it given the lack of comps-their competitors are small subs of big cos like JNJ and BHC.

    Surprised that they haven’t announced anything w/ the royalty portfolio, but if they don’t like the bids they get they can just continue to collect on it and make periodic distributions.

    The vote is 8/19 on liquidation approval.

  8. DavidW

    Thanks for the interesting idea. After the Noden sale I feel like my margin of safety compared to when I bought is eroding from 2 sides:

    * Price went up ~20% in a relatively short time period. Downside increases.
    * This was the conservative price I estimated for Noden, secretly I was hoping for a positive surprise with this company given their solid Q1 ’20 results. On top of that the payout period is stretched over 3+ years and not 100% certain if the acquiring party can pay their obligations over time. All of this reduces IRR quite a bit.

    The longer they take, the higher management and liquidation costs get. So for those reason I’m out for now, but I’ll definitely keep an eye on this one.

  9. Brian

    I think the agreement is generally favorable, but there remains concern about them getting paid the bullet. I’ve been active with the position, adding in the high 2s/low 3s and I trimmed about 20% of my position yesterday.

  10. dt

    PDLI seems to be proceeding with Lensar spin-off and provisional separation agreement has already been filed. However, the press release still states that the final decision has not been made yet :”PDL’s management and Board of Directors continue to explore all strategic alternatives for LENSAR with a focus on optimizing value for PDL’s stockholders. The Board of Directors intends to make a decision regarding the spin-off within the next few weeks.”.

    https://www.sec.gov/Archives/edgar/data/882104/000088210420000139/a202008268-kex991.htm
    https://www.sec.gov/Archives/edgar/data/1320350/000119312520230231/d945311dex21.htm

  11. bigdaddy85

    Anyone see a special situation with the notes that are being repurchased or being converted to shares?

  12. Brian

    The remaining amount of notes is small and I’d imagine they’re trading up near parity given it is an offer for all of them

  13. Ilja

    Several updates from PDLI.
    – 3 royalty stream assets were sold (VB, AcelRx, and KYBELLA) for $4.35m. This is more or less in line with the fair value estimates in the Q2 report ($4.5m). However, overall since this write-up was posted, the royalty portfolio has seen some negative impacts and the current fair value (including the 3 that are being sold) is $233.8m (vs $262m at the time of the write-up).
    https://www.sec.gov/Archives/edgar/data/882104/000088210420000146/a202008318-kex991.htm
    – Noden sale was closed at a bit larger value than initially planned – $52.8m vs $48m earlier. The initial distribution is only $12.7m, while another $33m will come in 12 installments from Jan’21 to Oct’23. There are also 2 potential contingent payments totaling $3.25m and another $3.9m to be paid in four installments from Jan’23 to Oct’23. 
    https://www.sec.gov/Archives/edgar/data/882104/000088210420000154/a202009098-kex991.htm
    – Lensar spin-off was approved. PDLI shareholders will receive 0.075879 Lensar shares per each PDLI share. The distribution date is expected on the 1st of October (record date is the 22nd of Sept). No additional details have been provided by management so far. 
    https://www.sec.gov/Archives/edgar/data/882104/000088210420000156/a202009108-kex991.htm 

    Updated SOTP:
    – Cash net of convertible debt: $0.806/share (Q2 report).
    – Royalty portfolio: $2.05/share ($233.8m as of Q2 report).
    – Notes receivable: $0.43/share.
    – Lensar: the company has been impacted by the COVID-19 outbreak and the H1 revenues fell by 22% YoY. Assuming $25m revenues in 2020 and taking a conservative 1-2x revenue multiple, we get $0.22-$0.44/share.
    – Noden: $0.46/share in total ($52.8m sale), however, only $0.11/share will be realized initially with the remaining $0.35/share to be received until the Oct’23.- Alphaeon $0.05/share.
    – Less: further liabilities at $0.41/share 

    So the current value of PDLI stands at $3.61-$3.83/share (8%-15% upside), with $0.35/share (about 10% from the total upside) of the value being paid out periodically until 2023. Given the prolonged period of the liquidation, the attractiveness of the situation seems rather limited at this point. Of course, there are still many variables left, which could bump the expected upside (Lensar valuation, royalty stream value increase, etc.), however, with my limited expertise in the medical sphere, this just seems too risky to bet on. I guess it might be worth waiting until the spin-off to see where the Lensar share price settles. 

    1. Writser

      With both the royalty and Noden sales PLDI realizes large losses. They bought these three royalties for ~90m and Noden was acquired for ~200m. As disclosed in both the August, 31 and the September, 9 press release both transactions may qualify for tax benefits. The CARES Act allows for a five-year carryback of NOL’s generated in 2018 – 2020. In this case, if you realize ~240m in losses (for tax purposes, not for accounting purposes – there the loss has already been realized) and you can carry them back to offset the large profits in 2015 – 2016 – 2017 you are looking at a potentially huge tax benefit.

      The tax rate was 35% in those years, so a 240m NOL carryback could potentially generate up to ~$84 m in tax benefit, about 75 cents / share. I believe that that’s why the CARES Act is explicitly mentioned in both press releases.

      I am not a tax nor an accounting expert and I don’t know exactly how to quantify the value of these tax benefits, nor am I exactly sure if they are already reflected on the current balance sheet (though I suspect not). So there’s still some uncertainty here. Still, I think that the CARES Act implies there could be a nice kicker that is not included in the above scenario.

      It’s ridiculous that the US government is practically giving away tax payer money hand over fist this way to a bunch of idiots that made stupid acquisitions, but I guess that’s the way it is ..

  14. g4734g

    LNSR is open and trading, very erratic and a large spread….At $10 a share, (I sold at 10) seems to be a nice combined pop for the PDLI/LNSR combination.

  15. Brian

    PDLI completed the spin of LNSR yesterday which is trading around $9.20. This is worth about 70 cents per share of PDLI. With PDLI now trading at $2.75, the stock has traded down by much less than the spin-off value (about 48 cents down versus 70 cents worth of Lensar).

    Lensar did $31 mil in revenue last year, which is way down this year due to the decline in elective procedures related to Covid. They also capitalized Lensar with $50 mil in cash, which at recent cash burn rates is about 2 years worth.

    I’ve elected to sell my Lensar.

    1. dt

      Where do you see that Lensar was capitalized with $50m in cash? I can find notes on $37m contributions. Was there anything on top of this? Thanks.

      “In July 2020, we issued an additional 740,740 shares of our common stock to PDL in exchange for $8.0 million. In August 2020, we received cash of $29.0 million from PDL. We issued 746,767 shares of common stock to PDL in exchange for $8.3 million. The remaining $20.7 million was a cash contribution from PDL.”

      https://www.sec.gov/Archives/edgar/data/1320350/000119312520245277/d945311dex991.htm#rom945311_9

      1. Writser

        Yeah, I also just see $37m, on top of the $5m that was already allocated to Lensar. So ~$42m cash less for PDLI pro forma is what I’m working with. I don’t know what Lensar is worth but the deployed capital is $47m according to PDLI. Even if you double that to account for the cash on the balance sheet you arrive at ~$9 / share. Was surprised to see it trade higher than that, was expecting $6 or something. The company is too hard to value fundamentally for me to assign a significant higher value to the company prospects. Also, I’d think that the fact that they had to spin it off itself implies that there was not super much buying interest in the private market. Makes me a bit more skeptical about the company value. On top of that the company is very tiny and the costs of a public listing will be a material drag on profitability.

        I could be wrong, but I’m happy to sell to somebody who understands this company better than I do > $9 / share.

    2. g4734g

      Brian, thanks for the idea on PDLI. I was able to get in and out a couple times including yesterday where I sold both Lnsr and pdli. I noticed you said you sold your LNSR, PDL I drifted even lower throughout the afternoon and closed at 261. Wondering if you have an updated thought process on PDLI now that it has gone Ex div lnsr? Sometimes it seems there are interesting opportunities as the arbitrage crowd is squaring their books, and not necessarily focused on current values. Thanks again for the write up

  16. g4734g

    Still wondering in anyone is keeping close track of PDLI pro forma SOTP value after Lensar spin?……at 2.35 by all metrics previously presented here, it seems undervalued by 10-15%. Would like to determine if price prior Lensor spin was arbs running it too high to play the spin, or if the current price is a value as those playing the spin exit without regard to value?

    1. Writser

      Seems cheapish, yeah. The big question is the royalty portfolio. Everything else has been monetized basically.

  17. W51W52

    The proxy statement gave a range of $360 million to $680 million based on shares outstanding at that point in time.

    Take out $64.4 million for EVFM (mentioned in the proxy statement).

    Take out $78.4 million for LENSAR (8,667,397 shares distributed, $9.0445 cost basis that I see from my account statement the day after distribution)

    I get to $217.2 million to $537.2 million remaining value.

    114.1 million shares outstanding as of 08/31/20 (Per LENSAR Form 10). They also have 11.746 MM options outstanding with a strike price of $2.56 as of 06/30/20, probably adjusted down to $1.87 or so post LENSAR spin. We also know that $11.2 million out of the $14.805 million convertible notes have chosen to convert. I haven’t calculated what the share count added from the conversion would be (post LENSAR + Make-Whole Premium), although you obviously would add $11.2 million of value back to the range since the liability goes away.

    1. Writser

      The problem with this approach is that the company has monetized all its assets already, apart from the royalty portfolio. And we don’t know what value the company was assigning specifically to Lensar (nor to Noden, Evofem warrants, etc). That range is now super wide and I’m not sure it is very relevant anymore. Maybe it gives an indication of a worst-case scenario. But at this point I think you are getting a more accurate picture if you do a bottom-up valuation instead. I.e. you have the royalty portfolio, warrants, pro-forma cash and the receivables from all asset sales minus remaining liabilities and wind-up costs.

      Alternatively you can wait for Q3 financials where they probably switch to liquidation basis accounting. And I’d think they should also be able to come up with new guidance. I’d be surprised if the best-case scenario from the proxy is still on the table.

  18. Brian

    PDLI has moved to liquidation basis of accounting, estimating NAV to be $3.35/shr. There are question marks with the asset values, however the stock is trading at a 30% discount to NAV/42% upside to the NAV which gives one a cushion for error. The royalty assets continue to generate significant cash, including $17.6 mil last quarter, which was a rebound from the 2Q when volumes were hit by covid. Cash on a pro forma basis was 72 cents at 3Q. Still possible the royalty assets could be sold, if not the company can continue to collect the cash flows and pay them out. It’s expected the company will delist and cease trading in early 2021. Still long.

  19. g4734g

    Thanks Brian, I went thru the conf call transcript, where were you able to gather the $3.35 number and other details? It seems the investor may be rewarded handsomely in exchange for locking up their money for up to 3 years.

    DT, would love to get your current thoughts on this one.

  20. Brian

    PDLI will cease trading around 12/28, so if you don’t want to get stuck with an non-tradeable liquidation stub it’s advisable to sell before. There was some insider selling recently

  21. Brian

    PDLI trades at $2.70 today, in full disclosure today I closed out my position so as not to have clients marked at zero after the delisting.
    There was also Lensar spin-off which delivered $0.7 per PDLI share. So overall this trade ended up slightly above breakeven (+5%).

    I won’t be updating further.

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