PDL Lands in a Hazard

The saga of PDL BioPharma (Nasdaq: PDLI  ) shows how fast fortunes can change for a biotech company. Just two years ago, PDL was one of the brightest stars of the biopharma circuit: It had a growing drug pipeline and a good partnership deal with Biogen Idec (Nasdaq: BIIB  ) . It was sitting on the cusp of profitability thanks to a stream of royalties from top-selling biologics like Genentech's (NYSE: DNA  ) Avastin and AstraZeneca's Synagis (NYSE: AZN  ) .

But PDL has gone from three strokes under par to mediocrity in relatively short order thanks to egregious spending in the past few months, several delays in its pipeline, and today's announcement that it is "terminating" development of lead drug Nuvion, a colitis treatment.

Two-Stroke penalty on Nuvion
The decision to end development of Nuvion was the big shocker in yesterday's announcement. Before being shelved, Nuvion had the potential to be the only biologic besides Johnson and Johnson's (NYSE: JNJ  ) Remicade to help treat refractory ulcerative colitis.

Just four months ago, PDL announced that it was bringing Nuvion into phase 3 testing after its data monitoring committee (DMC) had given the thumbs-up. The new data the DMC looked at must have been particularly bad, as its last peek at the study was after 60 patients had passed the 45-day treatment point, and the most recent update included results from only another 31 patients.

The reason given for terminating the Nuvion clinical program was "insufficient efficacy and an inferior safety profile" versus comparable drugs after 45 days of treatment in the phase 2/3 study.

A mulligan on ESP
The other big piece of news in yesterday's announcement was that PDL would be looking to sell off the assets it acquired when it bought ESP Pharma for $500 million in cash and stock more than two years ago.

The main reasoning behind the acquisition of ESP Pharma was that it would provide a commercial organization and a ready-made sales force for Nuvion once it launched in 2009.  

When PDL announced how slow Nuvion was progressing in the clinic last year, it was harder to justify the ESP acquisition. When PDL shelved ESP's lead pipeline candidate Ularitide, the acquisition became even harder to justify.

Now that PDL has "terminated" its development of Nuvion, any beneficial synergies from holding ESP's assets have been eliminated, and it makes sense to offload the ESP operations. Even though PDL's CEO said today that he believes PDL has "created significant value" with the ESP assets, we'll have to see if they fetch more than the $500 million PDL paid for them. 

On par with management changes
Shares of PDL are down only 19% this morning, presumably because the thought of a leaner and thriftier PDL with its royalty-generating potential is a welcome relief to some investors.  

Even with the loss of Nuvion, and Ularitide, once it sells off the drug, PDL still has its partnered phase 2 compounds with Biogen Idec in its pipeline. Investors can also take solace in the fact that PDL will have a new CEO by the end of the year thanks to activist hedge fund Third Point.

PDL BioPharma is an active pick of the Fool's market-beatingRule Breakers newsletter. You can check out all the recommendations, as well as get access to our message boards and exclusive content, with a 30-day free trial.

Biogen Idec is a Stock Advisor pick, and Johnson and Johnson is an Income Investor selection.

Fool contributor Brian Lawler likes to golf, but does not own shares of any company mentioned in this article. The Fool has a hole-in-one disclosure policy.


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