In 18 months, PDL BioPharma, Inc. (PDLI) has lost roughly half of its market cap. The slide wasn't unexpected: Investors have known for a long time that PDL BioPharma's core patents would expire at the end of 2014. But can the once-highflying company turn things around?
Even though the group of patents known as the "Queen et al." patents, from which PDL BioPharma generated practically all of its revenue, expired in December 2014, the company continued to profit for a while. PDL and Roche subsidiary Genentech reached a legal settlement, and as a result, royalties kept flowing in through the first quarter of 2016 for Avastin, Herceptin, Xolair, Kadcyla, and Perjeta.
Revenue fell off the cliff in the second quarter, however, plunging to only $21 million from $103 million in the prior quarter. PDL now receives over two-thirds of its scaled-down revenue from a licensing deal with Biogen for multiple-sclerosis drug Tysabri.
PDL BioPharma was a cash cow for years, making lots of money off its licensing deals. The stock was also a cash cow for investors, as PDL's dividend yield stood among the highest in the healthcare industry for a long time. That's not the case anymore. In August, the company's board of directors eliminated the quarterly dividend payment due to the dwindling revenue stream.
Wheeling and dealing
Well before the Queen et al. patents expired, PDL BioPharma began making deals with the goal to preserve the company as a viable entity. The company entered into several credit agreements, loaning money to other organizations including CareView, a provider of on-demand application services for the healthcare industry, and medical-device makers Direct Flow Medical and Paradigm Spine.
PDL also bought royalty rights from several other companies. The biggest of these deals was with DepoMed (NASDAQ: DEPO) in 2013. PDL paid $240.5 million for rights to receive royalties and milestones payable on sales of five of DepoMed's type 2 diabetes products.
In another licensing arrangement, finalized in 2015, PDL agreed to provide up to $200 million to Ariad Pharmaceuticals (NASDAQ: ARIA) in exchange for royalties from sales of leukemia drug Iclusig. Terms of the deal are a little complicated, but PDL stands to ultimately receive 7.5% of Iclusig revenue.
Can PDL BioPharma turn things around? The credit agreements certainly won't make it happen. While PDL receives nice double-digit-percentage interest rates with the deals, there's simply not enough money at play to be a huge factor.
PDL's revenue already includes royalties from diabetes drugs that DepoMed has out-licensed, including Glumetza, Janumet XR, and Jentadueto. The three drugs combined to generate 20% of PDL's revenue in the second quarter of 2016. That helps, but it's still not nearly enough to help the company turn things around.
What about the Ariad deal? Sales for Iclusig are growing. However, the drug's use is still limited to high-risk patients. Iclusig is on track to make a little over $130 million for Ariad this year. Even if PDL received the maximum percentage in its deal with Ariad, it still wouldn't be enough to move the needle very much. And if Iclusig somehow becomes much more successful, Ariad retains the right to buy back the royalties at any time it wants.
There are two wild cards for PDL, though. One relates to Lilly's (NYSE: LLY) experimental Alzheimer's disease drug solanezumab. PDL BioPharma stands to gain 2% of any royalties on sales of the drug based on a "know-how" license for technology provided in the design of the monoclonal antibody. Solanezumab could bring in peak annual sales of $3 billion if it's approved. That would translate to $60 million per year for PDL BioPharma. This would definitely be helpful for the company, but it still would not be enough to get it back to the revenue levels that it has seen in the past.
The other wild card is that PDL still has nearly $116 million in cash, cash equivalents, and short-term investments. Perhaps another deal can be made using this cash stockpile that pays off in a major way.
My view is that there are really two pertinent questions for PDL BioPharma. First, can the company get back to the revenue levels that it had prior to the Queen et al. patents' expiration? I think the answer to that question is a resounding "no."
The second question, though, is what we started out asking: Can PDL BioPharma turn things around? I think the answer to that question is "maybe." PDL could increase revenue and earnings again if it's lucky. Approval for Lilly's solanezumab might be the ticket to make that happen.