What: Shares of PDL BioPharma (PDLI), a company that specializes in purchasing patents and royalty interests on branded therapeutics, rocketed higher by 13% in April based on data from S&P Global Market Intelligence.
So what: Although PDL BioPharma didn't have any discernible news events that directly drove its share price higher in April, two factors likely played a role. First, there was the general outperformance of the downtrodden biotech sector. The SPDR S&P Biotech ETF rallied by a low double-digit percentage during April, boosting traditional drug developers as well as royalty asset holders like PDL BioPharma.
In addition, as of mid-April, PDL BioPharma had 13.3 million shares held by short-sellers, or traders who are betting on PDL's stock price to fall. This represents about 9% of PDL BioPharma's float, and based on its average volume of 2.3 million shares, it could take more than a week for pessimists to theoretically exit their positions if the average volume were maintained. It's my presumption that the rapid rise in biotech stocks during April may have triggered a small bout of short covering that further buoyed PDL's stock.
Now what: Regardless of the forces that were behind PDL BioPharma's rebound in April, the likelihood of its rally being sustained appears to be slim to none.
The advantage of PDL BioPharma's business model is that there's little overhead beyond acquiring royalty assets and patents. Since there's no traditional research and development involved, PDL's expenses are much lower than those of its peers, meaning it doesn't need a lot of revenue to turn a profit.
On the downside, patents on branded drugs only have a finite life span, and PDL's important Queen patents, which generated royalties on a number of blockbuster oncology drugs, expired in late 2014. After benefiting from the sale of stockpiled therapies in 2015 and the first quarter of 2016, PDL is being exposed in Q2 2016 and beyond to a world without Queen patent revenue, and it isn't pretty. Revenue is expected to plummet by 68% in 2016 and by another 64% next year. In total, the $590 million PDL recorded in 2015 revenue could be whittled down to less than $70 million by fiscal 2017. By a similar token, PDL's $2.04 in EPS in fiscal 2015 is projected to turn into just a $0.06-per-share profit in 2017.
Even more damaging, PDL BioPharma's loss of its Queen patents forced the company (with good reason) to slash its dividend by 67% to $0.05 per quarter. PDL's yield had far exceeded 10% at one point, and income investors were drawn in like ducks to water. PDL's board has made it clear that its dividend is reviewed on a quarterly basis, meaning it's quite possible that its quarterly payout might disappear entirely later this year.
Until PDL finds a way to replace its substantial loss of revenue, I would suggest keeping your distance.