PDL Biopharma (PDLI)

(26 January 2017)

PDLI Business Summary

PDL BioPharma Inc is engaged in the discovery of a new generation of targeted treatments for cancer & immunologic diseases. It focuses on intellectual property asset management, investing in new royalty bearing assets & maximizing value of its patent.

PDLI Fundamentals

• Price to Earnings: 2.15
• Earnings Per Share: $1.06
• Market Cap: 384.1M
• Current Ratio: 2.92
• Return on Equity: 23.85%
• Return on Assets: 16.10%
• Dividend Yield: 16.95%
• Price to Sales: 1.19
• Price to Book: 0.75
• Price to Free Cash Flow: 9.29

Balance Sheet ($ in Millions)

• Total Current Assets increased $34.
• Total Assets increased $167.
• Total Current Liabilities increased $99.
• Total Liabilities increased $155
• Total Stockholder Equity increased $57.

Income Statement ($ in Millions)

• Total Revenues increased $33.
• Income from Operations increased $22.
• Net Income increased $10.
• EBITDA increased $28.

Cash Flow Statement ($ in Millions)

• Net Cash provided by operating activities decreased $7.
• Net Cash used in investing activities increased $168.
• Net Cash provided by financing activities decreased $8 (to $0)
• Free Cash Flow decreased $66.

Notes from Phone Call with CFO Peter Garcia

• Currently the book value of the stock is almost twice as high as the current trading price.
• Some people on Wall Street are discounting the loans on their assets against them.
  • But even with that, you would arrive at a stock price at $3 to $4.
• They are paid on royalties on interally developed technology.
• A headwind is the 35% corporate tax, which they are a full payer of.
• They have a 10% dividend.
• Headwind: Some royalties came to expiration and were not able to renew them into the future.
• They restructured their debt to be moved out to Dec. 2021, with a lower interest rate.
• Business wise, they have shifted strategies. What they used to do was buy royalties from other companies, inventors, and they would loan money to other companies.
  • Now, they are making investments in equity products, which will result in increased revenues in the future.
• Another reason for the share price fall was one large healthcare investor dumped all his shares at once.
• Trump Tax reform would help big time, they would even bring back their subsidiary in Ireland (for tax purposes) to the United States.
• PDL announced that it would increase drug prices modestly, according to inflation / the industry, and pledged to never hike a drug price up by more than 50%, which is a moral high ground move.

Entry Level: $2.30 or lower

• Since it’s high in June 2014 of $10.00, the share price dropped $8. Even according to MorningStar, PDLI is trading at only 77% of it’s fair value, giving it a margin of safety of 23%.

Exit Level: $12

• Intrinsic value using discounted cash flows has the stock at a fair value of $11. I would be comfortable selling at this price, since it would have realized it’s intrinsic value, while providing a handsome return to the investor.

Reasoning

• I was initially bullish before the call with the CFO, but now I am more confident. Firstly I am confident because of the margin of safety, which presents us with a cushion and protection from losses.
• These prices are basement level, and they provide a chance to give a handsome return.
• Just based on book value alone, this stock is trading at half of it’s book value.
• Over the last three years, the book value of the stock has increased, yet it’s share price continued to drop.
• I like their changes in business, switching from purchasing royalties, to buying equity positions in companies that produce these products and royalties.
• I am optimistic that their revenue and free cash flow will increase in the future, and I understand the drop in cash flow due to the changes in their business strategies which now require more up front capital for acquisitions.