When a pharmaceutical company gets bigger, and research and development expenses mask the cash flow that its marketed drugs are bringing in, it sometimes makes sense to separate out the cash flow-generating assets from the rest of the company to better realize their value. This was the reasoning behind activist hedge fund Third Point's breakup of Ligand Pharmaceuticals'
In conjunction with the sale of these drugs, Ligand received $480 million from Japanese drugmaker Eisai and King Pharmaceuticals
Ligand currently has $415 million in cash and investments, but the dividend payout will reduce this to $160 million and change. This delectable return of cash to shareholders will amount to $2.50 a share, or nearly a 25% of Ligand's current stock price. Doling out a one-time dividend such as this is a good way to return cash to shareholders if there is no other good use for the money, but it's worth remembering that the stock price will fall by this amount once the cash is paid out.
Prior to the dividend, more than 40% of Ligand's market capitalization is supported by the cash and investments on its balance sheet. Breaking Ligand's operations apart and selling off some of its assets is part of Third Point's plan to unlock some of the hidden value in the company's shares. The plan has met with mixed success, with shares of Ligand trading in the middle of its 52-week range and about flat from when the asset sale was announced in September.
This is probably a small taste of what may be in store for other drug companies, like Nabi Biopharmaceuticals
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.
