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PDL BioPharma, Inc. Shares Just Fell Off a Cliff -- Here's Why

By Sean Williams – Feb 2, 2016 at 4:30PM

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PDL BioPharma's long-awaited dividend cut has arrived, and investors aren't too thrilled.

What: Shares of PDL BioPharma (PDLI), a biotech company that focuses on purchasing and developing royalty-based patented assets, sank as much as 13% after the company outlined its new dividend policy.

So what: According to PDL BioPharma's press release after the closing bell on Monday, the company will pay a dividend of just $0.05 per share to shareholders on March 11 -- that's down 67% from the $0.15 paid in previous quarters. Furthermore, the company noted in its release that it was shifting to a quarterly assessment of dividends in order to retain much of its current cash position to make earnings-accretive deals over the near- and long-term. The company ended the fiscal year with approximately $219 million in cash and cash equivalents.

Why is the company making this move? The big issue is the expiration of its Queen patents, which account for around 85% of PDL BioPharma's total revenue. These patents expired in Dec. 2014, and the revenue being generated from them will dry up rapidly as the last of the orders containing its patents are sold in the first half of 2016. PDL may only be marginally profitable by 2017 after turning in $1.86 in EPS in 2014.

Image source: PDL BioPharma.

Now what: The caution flag on PDL BioPharma has been waving for some time, but the red flag is officially up now. Without PDL BioPharma's lucrative dividend, the stock just isn't very attractive. It's on pace to lose around 85% of its sales in a two-year span, and it could struggle to generate significant income if it can't work out new royalty deals.

To add to that, royalty companies can also dilute existing shareholders by raising cash vis-a-vis common stock sales for acquisitions. PDL has not hinted at doing anything like that, but I wouldn't discount the possibility that it could happen.

It's always possible PDL BioPharma could make an earnings-accretive transaction or two and be right back into the swing of things, but I'd highly encourage investors to steer clear of this investment until we have more long-term clarity.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

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