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What happened

Shares of PDL BioPharma (PDLI), a royalty company in the biotech space that earns its keep by reaping the rewards of its acquired intellectual property and low overhead costs, sank 17% in August, according to data from S&P Global Market Intelligence. The culprit behind the move was the announcement of widely expected but unwanted news.

So what

Following the report of its second-quarter earnings on Aug. 4, PDL BioPharma issued a separate press release that it was eliminating its quarterly cash dividend. For years PDL BioPharma had been the premier dividend-yielding stock in the biotech sector, averaging in many instances 6% or higher.

The reason for the eliminated dividend? The vast majority of PDL's revenue is generated from its Queen patent portfolio, which predominantly expired in December 2014. PDL's intellectual property is found in blockbuster drugs like Herceptin, Avastin, and Tysabri. PDL's revenue didn't fall off a cliff immediately because management had cautioned that it would take 12 to 18 months to completely sell down warehoused product still covered by the Queen patents. With that product now sold, PDL is slated to lose close to three-quarters of its revenue stream in the coming year, with its profits expected to fall around 90% from the $2.04 per share it reported in fiscal 2014. For added context, PDL still receives royalty revenue from Tysabri, but its arrangement with Genentech, which accounted for most of its revenue, has expired.

Now what

PDL BioPharma is essentially going to have to start from scratch if it wants to regain the trust of shareholders and reinstitute what had become biotech's most lucrative dividend.

This began in July, when PDL announced that it was making a $107 million investment in Noden Pharma DAC and an affiliate, with $75 million of that being an initial equity investment. The attraction to Noden was its acquisition of Tektuma (known as Rasilez outside the United States), a drug designed to treat hypertension, which generated $154 million in sales in 2015.

We saw further action in late July when PDL completed its second $50 million tranche payment to Ariad Pharmaceuticals (NASDAQ: ARIA), giving the company a 5% royalty on sales of blood cancer drug Iclusig in the U.S. and Europe. In other words, PDL is doing what it can to reignite its growth engine, but it could clearly take time for these investments to generate positive returns for investors.

My suggestion, for the time being, would be to remain safely on the sidelines. Without a dividend the primary reason to own PDL BioPharma has been tossed aside, leaving a company whose business model is clearly in transition.