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Best Case for PDL BioPharma's Sale

The sum of the company's parts won't get shareholders their rightful value.

PDL BioPharma

(PDLI) - Get PDL BioPharma, Inc. Report

has put itself up for sale.

What's the company worth and who are the potential buyers?

Analysts have been busy with spreadsheets trying to put some hard numbers to that first question. The results: a fairly wide range that pegs PDL's per-share valuation from the mid-$20s to the high-$30s.

PDL closed Tuesday at $23.24, up nearly 9%.

Valuing PDL is somewhat of a complicated process, because there are three or four primary facets to the business and a likelihood that no single buyer will want them all.

PDL's announcement suggests that it prefers to find a single buyer, which would then be free to sell off parts of the business it doesn't want. If this scenario plays out -- and a bidding war occurs among potential acquirers -- PDL could see the upper end of that valuation range.

On the other hand, if PDL can't find a single buyer but has to break down the company and sell it off in too many pieces (and does it badly), it may only be able to extract $20 or so in value for the company.

"From a risk-reward perspective with the stock still in the low $20s, I think

PDL is still favorable," says Susquehanna Financial Group analyst Jason Kolbert. He pegs PDL's value on the auction block in the $25-$30 range, with upside if there is a bidding war for the assets. Kolbert has a positive rating on the PDL shares and his firm has no banking relationship with the company.

Another analyst with a biotech hedge fund who has spent a good bit of time on PDL values the company higher -- in the $30-to-$33-a-share range.

"We think there are buyers at PDL's doorstep and have been for some time. The holdup has been internal, with the reluctance of PDL management to sell getting in the way," said this analyst, who asked to remain nameless.

The most valuable piece of the company is likely the technology and underlying patents for creating humanized monoclonal antibodies. This forms the basis for many of the most successful biotech drugs currently on the market, including



cancer drugs Avastin and Herceptin. Other monoclonal antibodies humanized using PDL know-how include Medimmune's Synagis and

Biogen Idec's

(BIIB) - Get Biogen Inc. Report


The licenses and royalty revenue that PDL derives from its monoclonal antibody technology will bring in about $240 million this year, with the potential to increase to $450 million to $500 million in 2013 when the patents expire.

This royalty stream is worth between $1.8 billion and $2.5 billion, or $15 to $25 per share, according to several analysts.

The other pieces of PDL include:

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Three approved acute-care drugs for acute hypertension, heart attack and bone marrow transplant sold by a hospital-based sales force. The drugs aren't big hits commercially, but would likely find a good home inside a specialty pharmaceutical company and are likely worth in the $3-to-$6-a-share range.

A pipeline of experimental drugs in the mid-stage of development, two of which -- daclizumab (multiple sclerosis) and volociximab (cancer) are partnered with Biogen Idec. PDL has been a chronic underachiever when it comes to developing its own drugs -- the list of failures is long -- so the company doesn't get much credit for the pipeline. At best, there might be $3-a-share in value here, although many analysts are lower.

A biologics manufacturing plant and the expertise to make monoclonal antibodies that goes with it. This asset could be the diamond in the rough, so to speak, especially to a pharmaceutical company -- domestic or foreign -- with a desire to set up its own biologics manufacturing capacity. This asset could be worth $3 to $10 a share, depending on the buyer.

PDL also has about $4 a share in cash, and something even more attractive to buyers: about $400 million in net operating losses that will play well on a balance sheet.

That's the breakdown of the business, but who might come a-knocking?

One potential bidder mentioned frequently is Royalty Pharma, an investment entity set up specifically to acquire the royalty interests of biotech and pharmaceutical products, which it holds as part of a diversified portfolio.

Recent Royalty Pharma deals include a $700 million purchase of Humira royalties from Cambridge Antibody Technology, a $650 million deal for Remicade royalties from New York University and a $500 million joint venture with

Gilead Sciences

(GILD) - Get Gilead Sciences, Inc. (GILD) Report

to acquire royalties to Emtriva from Emory University.

Royalty has been considering a bid for PDL's antibody license and royalty stream for months, according to people familiar with the negotiations. Due to its specialized structure, Royalty Pharma is able to acquire drug product royalty streams on a tax-free or tax-discounted basis, which in turn, makes the royalty streams more valuable as an asset and allows the firm to bid higher.

"On a fully-taxed basis, PDL's royalty stream might be worth $20-$25 per share, but to an entity like Royalty Pharma, it could be worth $25-$30," says one institutional investor with knowledge of Royalty Pharma interest in the PDL business.

Royalty Pharma didn't respond to a request for comment.

Royalty Pharma won't be interested in owning drugs or manufacturing plants, so if a single buyer is to step up, it could be a mid- to large-sized pharmaceutical firm, either domestic or international.

Foreign drug companies, most notably those based in Japan, may be particularly interested in owning a U.S.-based biologics manufacturing plant. They could also take on PDL's antibody licenses and royalty stream.

When it comes to an acquisition by a larger biotech firm, Biogen Idec is the suitor most often mentioned given its existing partnership with PDL and existing economic interest in the royalty business. (It pays royalties to PDL on sales of its multiple sclerosis drug Tysabri.)

Biogen Idec executives have declined to comment specifically on whether it has considered buying PDL, but Biogen CEO Jim Mullen has at least hinted that he's taken a look but passed.

However the disposition of PDL assets eventually turns out, most observers agree that the process is finally moving forward. Months of pressure from activist hedge funds like Daniel Loeb's Third Point has forced the ouster of CEO Mark McDade and persuaded the board to unlock the company's value with a sale.

"The biggest worry was that PDL was going to sell its royalty stream and just burn the money away on its pipeline," says Susquehanna's Kolbert. "That's no longer a concern, I think, and is a big reason why the stock is up."

Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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