Shares of PDL BioPharma (PDLI), a biotech royalty company, imploded in November and lost 32% of their value according to data from S&P Global Market Intelligence. The sole reason PDL BioPharma fell precipitously throughout the month can be traced to a single event.
In mid-November, PDL BioPharma announced that it was planning to issue $150 million worth of senior convertible notes, much of which was going to be used to retire debt that was coming due. On Nov. 22, PDL confirmed that it had issued $150 million in aggregate 2021 senior notes, with the underwriters having the option to purchase up to an additional $22.5 million. Of the $145.8 million in net proceeds, $14.4 million was used to fund a previously announced capped call transaction, while $121.5 million was used to repurchase $120 million of its 4% convertible senior notes due 2018, plus $1.5 million in accrued interest.
The main reason PDL BioPharma shares were crushed has to do with the new offering being "convertible." In easier-to-understand terms, note holders have the option of converting their debt into shares of PDL stock at an initial conversion price of $3.81. Another way of looking at this is the note holders could wind up increasing PDL's outstanding share count and dilute existing shareholders in the process. It may also temporarily cap PDL's share price around $4 -- assuming it gets anywhere near there -- because of the threat of note conversions.
To a lesser extent, shareholders may also be disappointed with the fact that no additional capital was raised to make additional acquisitions. Since royalty companies rely on their assets to make them money, the fact that most of the proceeds raised are already spoken for may have led to some selling.
The bigger issue for PDL BioPharma is the loss of its Queen patents tied to drugs from Genentech. These patents have historically made up the bulk of its revenue, but that royalty stream officially ended in late 2014. After benefiting from selling what remained in the warehouse, which took a good year and change, PDL is now fully exposed to life beyond most of its Queen patents.
In the third quarter, PDL reported just $53.6 million in revenue compared to $124.6 million in the year-ago quarter. Of that, just $15 million came from its Queen patents in Q3 2016 compared to $119.2 million in Q3 2015. This lack of revenue has slashed its profitability and completely gutted and suspended its once juicy dividend – and let's face it, a royalty company without a dividend isn't very attractive.
PDL BioPharma essentially has to start from scratch. This means it may have to spend a lot to get its royalty stream even halfway back to where it used to be, which could mean more dilutive offerings in the future. That's not an investor-friendly scenario. My suggestion would be to stick to the sidelines and remain there until PDL's bottom line demonstrates substantial improvement.