With each passing week, the PDL BioPharma
On Tuesday, the curtain fell on the reign of CEO Mark McDade. He chose to resign immediately, rather than waiting until the end of the year as he'd previously stated.
Shares of PDL rose nearly 10% this week, to $23 and change, following the news of McDade's resignation and the announcement that PDL would "actively seek offers for the sale of the company as a whole or of its key assets."
When I tried to value shares of PDL in early September, I came up with roughly $2.9 billion for all of PDL's assets, besides its drug pipeline. Given the run-up in shares since the article, it's time to put a value on PDL's drug pipeline as well, to see whether shares are still undervalued today.
The art of valuing intangibles
After the failure of its ulcerative colitis drug candidate Nuvion in clinical testing, PDL's active drug pipeline consists of two phase 2 drug candidates -- daclizumab for multiple sclerosis, and volociximab for solid tumors -- and one phase 1 compound targeting multiple myeloma.
There are several ways to put a value on a drugmaker's key drugs. Risk-adjusted net present value analysis and top-down valuation methods work well. But they're difficult to use for compounds, like PDL's early-stage drugs, that should have their sales potential discounted significantly because of development risk.
Another route to valuing a drug pipeline is to use relative valuations, comparing the value of Company X's drug pipeline with Drugmaker Y's equivalent. This approach works well for small pharmaceuticals with a few compounds targeting the same disease -- for instance, the many small-molecule anti-hepatitis C drugs in development from InterMune
Looking at past deals
Fortunately, I don't have to try one of the above valuation techniques for PDL's pipeline. Another drugmaker has announced how much it values most of PDL's drugs in development.
Back in 2005, Biogen IDEC
In the deal, PDL and Biogen agreed to split all development costs and operating profits from the co-promotion equally, in exchange for $40 million up front, a $100 million purchase of PDL stock, and $660 million in potential development and commercialization milestone payments.
Essentially, Biogen bought a roughly 50% stake in these compound. We can use that to help tease out an approximate value for these pipeline drugs.
Since the partnership deal, PDL and Biogen have discontinued development of fontolizumab. They did initiate a second phase 2 trial for daclizumab, after announcing positive phase 2 study results for the drug earlier this year.
Besides that, nothing else of note has happened with the Biogen partnered drugs, except for the release of modest volociximab study results at ASCO last year. All things being equal, the value of the drugs hasn't changed since the deal was signed.
Considering the $660 million in potential milestone payments and $40 million in upfront cash from the deal, this means Biogen will have to pay as much as $700 million for its 50% stake in the partnered drugs.
Potential milestone payments are less valuable than actual cash, so the upper ceiling for the value of the Biogen-partnered drugs is worth no more than $700 million to a potential acquirer -- possibly less.
To be conservative, I'd peg the value of PDL's active drug pipeline, including its fully owned phase 1 multiple myeloma drug candidate, at somewhere between $300 million and $700 million upper range.
Based on my previous valuation of $2.9 billion for the rest of the PDL parts, this puts fair value on shares of PDL, including its drug pipeline, anywhere from $3.2 billion to $3.6 billion. At its current market capitalization of $2.8 billion ($23.80 a share), this leaves only 14% to 29% upside for shareholders who continue to hold rather than cashing out now.
Considering the risks inherent in breaking apart the company or selling itself, and the possibility of weak daclizumab data further devaluing the pipeline, shares of PDL don't have enough of a discount to get me excited. I estimate that conservative investors should sell their PDL shares, now that they've run up closer to fair value.
