When Breaking Up Isn't Hard to Do

Sometimes splitting up can be the right thing to do.

One of the most interesting corporate trends in biotech this year has been drugmakers breaking themselves apart and spinning off business units. Last week, two biotechs announced progress in their divorce proceedings.

PDL BioPharma (Nasdaq: PDLI  ) and Enzon Pharmaceuticals (Nasdaq: ENZN  ) both took the final steps toward spinning out their development-stage pipelines -- after filing Form 10s with the Securities and Exchange Commission, of course.

What happens after filing a Form 10 is that the SEC will review a company's spinoff proposal for a couple of months, and if it's approved, the spinoff would be completed, creating a new company. Both PDL BioPharma's and Enzon's spinoffs should be completed around the fourth quarter, and investors holding shares of these companies would then own shares of what remains of the original company, plus shares of the new company.

Not all companies doing spinoffs make for attractive investments, but Enzon and PDL BioPharma each believe that investors will value each of their individual pieces more than they are valuing the sum of their parts. Also, spinning off a business can make it easier to sell it off. PDL is splitting off its drug pipeline from its royalty-generating patents, and Enzon is splitting off its already-approved and marketed specialty pharmaceutical drugs and royalty revenue stream from its development-stage biopharma pipeline assets.

PDL BioPharma and Enzon aren't the only biopharmas with breakups on their minds. ImClone Systems (Nasdaq: IMCL  ) has thrown around the idea of separating its drug pipeline from the royalty and manufacturing revenue generated by its Erbitux cancer therapy. Some of the health-care industries' biggest corporations, like Genentech (NYSE: DNA  ) , Hospira (NYSE: HSP  ) , and Medco Health Solutions (NYSE: MHS  ) , have come (or returned) to the market in the past 15 years as spinoffs from their parent corporations.

No matter the industry, spinoffs can offer investors some interesting opportunities. I highly recommend taking a close look at PDL's and Enzon's spinoff proposals (seen here and here) because the market often inefficiently values newly formed or spun-out health-care businesses (at least initially).

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Fool contributor Brian Lawler owns shares of PDL BioPharma but no other company mentioned in this article. Medco Health Solutions is a Stock Advisor recommendation. The Fool has an A+ disclosure policy.


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