PDL BioPharma's Split Decision

It isn't the most tax-friendly way to break itself up, but PDL BioPharma (Nasdaq: PDLI) announced last week that it was finally taking further steps to try to realize better value for the different parts of its business.

After putting itself up for sale last year and finding takers for some of its marketed drugs and manufacturing facilities, PDL BioPharma announced last month that it wasn't able to sell the rest of its business and humanized monoclonal antibody royalty revenue. On Thursday, though, PDL BioPharma showed that it's still trying to get the most for investors.

Once PDL BioPharma breaks apart in the next few months, investors in the current company (like myself) will own shares of both the royalty-bearing PDL and another PDL corporation consisting of all of its development-stage drug pipeline and other assets. The royalty-bearing PDL company will receive 100% of PDL's humanized monoclonal antibody royalties on drugs like Elan's (NYSE: ELN) Tysabri and AstraZeneca's (NYSE: AZN) Synagis -- and do almost nothing else.

PDL's publicly traded company No. 2 will keep PDL's rights to all of its drugs in development, including the compound daclizumab for multiple sclerosis, which is in phase 2 clinical trials, and other earlier-stage candidates. The company says that PDL No. 2 could survive for three years without needing to sign up for any more partnerships or a financing, using as much as $375 million in cash from its capitalization and royalties it might receive from already-approved PDL drugs like Cardene. This will give PDL enough time to see daclizumab through at least phase 2 testing, and it'll give its other three compounds in the clinic or about to enter the clinic enough time to get through proof-of-concept phase 2 testing.

Besides the split, PDL BioPharma also announced a $4.25-per-share dividend for shareholders who own shares on May 5. It's always nice to get cash back from a publicly traded company (multiple studies have shown that dividend-paying stocks outperform the broader stock market), but investors should be aware that PDL's share price will decrease by around the same $4.25 to account for less cash on the balance sheet after this dividend is paid.

Splitting PDL apart makes sense, because investors not wanting to take a stake in PDL's drugs in development will be able to sell their shares of the newly spun-off company and keep their rights to the humanized monoclonal antibody royalty income stream, at least until PDL's patents run out on these drugs after 2014.

Investors in the PDL royalty-bearing company also stand to gain on any other humanized antibodies that get approved under the PDL Queen patents. However, that could change if patent litigation with Alexion Pharmaceuticals (Nasdaq: ALXN) doesn't go PDL's way. Obviously, investors would have enjoyed PDL BioPharma getting a premium buyout price for itself, but the separation of its royalties from the rest of the business is a fair second- or third-best choice.