Protein Design Labs

(PDLI) - Get Report

has built a solid business as a drug-technologycompany, but can it successfully transform itself into a more profitabledrug developer?

A partial answer is coming Friday. PDL will take the wraps off resultsfrom a late-stage test of Zamyl, a drug being developed to treat acutemyeloid leukemia. Monday, the company also will release preliminary resultsfrom a midstage test of Remitogen, another cancer drug being tested innon-Hodgkin's lymphoma patients.

The results will be unveiled at the annual meeting of the AmericanSociety of Hematology, Dec. 7-11 in Orlando, Fla.

The fates of Zamyl and Remitogen are important to PDL because theyrepresent the company's plans for increasing profits in the future. Afteryears of licensing its technology to other drug firms, PDL is now in thebusiness of developing drugs on its own.

The "old" PDL has been a pretty good performer. The company'stechnology takes monoclonal antibodies developed in mice and makes themmostly human. Humanized antibodies work better in people because there isless chance that the drugs will be rejected by a patient's immune system.

Drugs such as

Genentech's

(DNA)

Herceptin, and

MedImmune's

(MEDI)

Synagis havebeen "humanized" by PDL, which receives a continuing stream of royaltyrevenue based on the drugs' sales. Last year, that royalty revenue wasenough to push the company into the black, with earnings of 1 cent pershare. This year, PDL is expected to earn 3 cents per share, according toThomson Financial/First Call.

But PDL will generate far greater revenue and profits if it can use itstechnology to develop and sell its own drugs. PDL faces increasingcompetition for its core technology from companies such as

Abgenix

(ABGX)

and

Medarex

(MEDX)

, so building its own roster of drugs also offersthe opportunity to set itself apart from its closest rivals.

Zamyl is PDL's most advanced drug prospect, while Remitogen and fiveother drugs candidates are in early or midstage testing. One of these otherdrugs, Zanapax, is already approved for transplant surgery and is sold by

Roche

. PDL is developing the drug further to treat diseases such as psoriasis and asthma.

"PDL's shares have performed better than Abgenix and Medarex becauseits internal drug pipeline is more advanced," says SG Cowen analyst BillTanner. "It's important for companies to develop their own drugs -- that'swhat the market wants." Tanner rates PDL a strong buy and his firm has doneunderwriting for the company.

Friday morning, PDL will announce the results of a phase 3 test ofZamyl involving just more than 200 patients who have failed conventionalchemotherapy treatments. Patients in the test received either Zamyl andchemotherapy, or chemotherapy alone. The company is shooting for a completeresponse rate of about 22.5% from the Zamyl arm of the study -- compared witha historical chemotherapy success rate of about 15%.

Investors might want to keep their Zamyl expectations fairly low. Earlyindications -- or at least Wall Street rumors -- don't give the drug muchchance of success.

"When we last talked to PDL management, Zamyl was the one drug whichdidn't give us the greatest level of confidence," says Tanner. "The bodylanguage we're getting from management suggests that the data may not lookencouraging and the company may not go ahead with the drug's development."

Salomon Smith Barney analyst Elise Wang concurred in a recent researchnote. "There is a high level of risk associated with this program," shesaid, adding that previous tests of Zamyl alone have yielded only limitedresponses. Wang rates PDL a buy and her firm hasn't done underwriting forthe company.

But PDL gets another chance at positive spin during the AmericanSociety of Hematology conference Monday, when it releases partial resultsfor a phase 2 test of Remitogen in patients suffering from non-Hodgkin'slymphoma. Earlier studies of the drug have shown promise, so PDL is hopingto build on that with more signs that the drug is safe and effective.

There is a billion dollar-plus market opportunity forbiotechnology-derived drugs to treat non-Hodgkin's lymphoma. The king ofthese drugs is Rituxan, marketed by Genentech and

IdecPharmaceuticals

(IDPH)

. Even if it is successful, however, Remitogen is not likelyto become another Rituxan because it works on a smaller subset of NHLpatients.

Maybe the trickiest thing to figure about PDL is its valuation, and howthat will be affected by the goings-on at the hematology confab. At itsDec. 3 closing price of $36.70 per share, PDL is worth $3.2 billion. Inother words, the company trades at a huge 600 times 2002 expectedearnings of 6 cents per share.

But as a drug-technology company that is only beginning to creep intothe drug-development game, a price-to-earnings ratio doesn't really do muchto fairly measure PDL. In reality, the company has more in common withrelatively unproven genomics firms such as

Millennium Pharmaceuticals

(MLNM)

and

Human Genome Sciences

(HGSI)

, both of which sport large valuations based moreon future promises than current performance.

Like Millennium and Human Genome, PDL is also comfortably cash-rich.The company finished the third quarter with cash and short-term securitiesvalued at $648 million.

"If I had to choose right now between PDL, Millennium and Human Genome,I would choose PDL for two reasons," says one hedge fund manager whodoesn't own any of the stocks. "First, PDL has more monoclonal antibodiesin development than any biotech firm other than Genentech. And second, thelicensing revenue it gets for its technology is based on a solid businessmodel that will grow over time."