PDL Gets Called Out

Activist institutional investors aren't new in the stock market, but in the past couple of years it seems they have become more and more commonplace in the pharmaceutical and biotech sectors. On Monday, Rule Breakers pick PDL BioPharma (Nasdaq: PDLI  ) got a mini-dose of activism when hedge fund Third Point filed an open letter with the SEC calling for certain actions to reverse the stock's slide over the past twelve months.

The gist of Third Point's complaints about PDL revolves around how it has handled its expenditures and development programs in the past several years. In particular, Third Point doesn't like PDL's acquisition of ESP Pharma and how it has handled its R&D spending.

While I don't agree that PDL overpaid for ESP when it made the acquisition -- PDL received a solid drug candidate in Ularitide and also got access to a ready sales force for any possible Nuvion launch -- to some extent, Third Point does have a valid point about PDL's extravagant spending ways.

For example, a common occurrence with some drug companies is that they are run like private universities, using shareholders as a funding source for expensive scientific research that can't be monetized. It's way too early to declare PDL one of these companies, but it's curious that it can spend $25 million to move its headquarters and R&D lab twelve miles away but yet pleads poverty and the need for a partner as a reason for delaying clinical studies of heart treatment Ularitide. Even worse, PDL plans on spending a total of $70 million to $80 million to build out its new shiny R&D lab. These funds could have just as easily been used to support a large phase 3 trial for Ularitide in Europe.

This isn't the first virtual kick in the pants Third Point has publicly made about companies that it owns shares in. Just last month, the hedge fund got its way when the CEO of Nabi Biopharmaceuticals (Nasdaq: NABI  ) resigned after warring with Third Point for some time. Third Point was also instrumental in convincing Ligand Pharmaceuticals' (Nasdaq: LGND  ) management to break up and sell off certain parts of its operations.

Activist shareholder influence can be beneficial for a company -- when it results in a more focused business. On the flip side, large shareholders who don't have the company's best interests at heart can sometimes be a detriment to other shareholders if they get measures passed that reward short-term interests but hurt the company's operations in the long run. It's too early to say what side of the coin Third Point will fall on with its interest in PDL, but investors should definitely pay attention to any possible changes that may come as a result of its actions.

PDL BioPharma is a Rule Breakers recommendation. Keep tabs on big events in tiny technology with a free 30-day trial subscription to David Gardner's Motley Fool Rule Breakers.

Fool contributor Brian Lawler was once an activist for free beer at his local pizza parlor but does not own shares of any company mentioned in this article. The Fool has a disclosure policy.