Protein Design Falls after Management Change

Updated from May 1

Protein Design Labs (PDLI Quote) shares fell 14% Thursday, one day after the biotech firm surprised investors by making some major changes to its executive ranks.

The Fremont, Calif.-based biotech firm, stung recently by a series of clinical disappointments, said late Wednesday that co-founder and CEO Larry Korn is stepping down, although he will continue to serve as chairman of the board of directors.

Also, Daniel Levitt, the company's head of research and development, has resigned to "pursue other interests."

PDL said its board has selected Douglas Ebersole, senior vice president, legal and licensing, as an interim chief executive. The board is starting a search for a permanent replacement.

Shares of PDL are down $2.42, or 14%, to $14.91 in recent Thursday trading. The company held an early morning conference call to discuss the management changes, fielding somewhat angry questions from skeptical investors, including some who questioned the timing of Korn's resignation and called for the company to put itself up for sale.

PDL is best known as a drug technology company that licenses its know-how to other firms. But the company is now trying to use its technology to develop its own drugs, albeit with decidedly mixed results so far. Two of its most advanced cancer drug candidates, Zamyl and Remitogen, have been stung with disappointing test results. An experimental psoriasis drug, Zenapax, has also failed to live up to expectations.

"This is a company that has been long on promise and short on delivery," says John McCamant, editor of the Medical Technology Stock Letter. "Looking back, PDL has a checkered history and has been basically unproductive on the drug development front."

A source familiar with the surprise resignation of Korn and Levitt says the two men were on the losing end of a power struggle within the company that has raged for the last week. Additional executives could also be short-timers, he added.

Last night, PDL's interim CEO Ebersole issued a statement to explain Korn's abrupt departure. "As PDL works toward commercialization of its product candidates, the Board believes that now is an appropriate time to seek new leadership that can expand and enhance PDL's efforts to achieve its vision," he said.

Ebersole echoed those sentiments on the Thursday morning conference call, but investors and analysts on the call didn't seem satisfied.

PDL is expected to release final results from a late-stage clinical trial of Zamyl at the upcoming meeting of the American Society of Clinical Oncology. Several investors on the call asked Ebersole if the board's decision to make a CEO change right before this crucial scientific meeting telegraphs a negative message about Zamyl's prospects. Ebersole insisted that the two events were not related.

Other investors called for the company to, at least, explore the possibility of boosting shareholder value by putting the company up for sale. Ebersole said PDL has no immediate plans to do so, although the company is always willing to entertain offers.

PDL has is currently trading 17% below lows reached after the Sept. 11 terrorist attacks, adjusted for a two-for-one stock split in October.

While the consensus opinion seems to be that Korn is leaving because PDL has underperformed, at least one analyst, CIBC World Market's Matter Geller, views the CEO's resignation as a good thing.

"We believe that today's changes are a function of the success of PDL's proprietary products. We believe the board wanted a CEO experienced in the late stages of drug development and marketing to take PDL to the next level," Geller wrote in research note Thursday. Geller reiterated his strong buy rating. His firm has a banking relationship with PDL.