PDL Biopharma, Inc.

We employ the use of net working capital as a proxy for liquidation value in our analysis – as a minimum valuation to judge whether a stock is selling for considerably less than its worth to a private owner.

Sometimes a company goes into self-liquidation.

PDL Biopharma (PDL) is one of those companies where management decided that the best course of action for stockholders is to liquidate itself. This stock is what Ben Graham called a ‘Special Situation’.

PDL, formerly known as Protein Design Labs, was founded in 1986. Its recent business strategy was to finance commercial stage and late clinical stage pharmaceutical assets via royalty monetizations, debt structures, or a combination of both. Later on, it pivoted to receiving equity in under-commercialized products.

Management estimates liquidation of PDL to fetch between $350m to $700m ($2.98 to $5.97/share) for the stockholders. The equity sells for $368m or $3.18/share at the close on May 15^th.

Book value as on March 31^st amounted to $553.1m or $4.59/share. (based on shares outstanding on March 31^st)

PDL comprises four segments: Medical Devices (Lensar), Strategic Positions (Evofem), Pharmaceuticals (Noden), and Income/Royalty generating assets (Queen).

Noden and Queen’s net assets were classified as held for sale on March 31^st and total $308.2m after adjusting for fair value (using conservative discount rates of 19% and 14.4% respectively) and deducting costs to sell. This amounts to $2.56/share. (The royalty assets generate cash of $75-80m/year)

PDL recently announced a distribution of all its Evofem shares i.e. 0.115 per share of PDL (record date of May 15^th). Evofem’s closing share price was $5.24 resulting in a distribution of $5.24 x 0.115 = $0.60/share.

Lensar currently generates operating losses. (The Lensar Laser System is used for cataract surgeries, which are elective, and delayed during Covid-19.)

Cash net of all recorded liabilities is $18.8m or $0.16/share.

These assets alone add up to $3.32/share or more than the current price.

Other assets mainly comprise of notes receivable of $52.6m ($0.45/share), which has been in litigation for several years but is more than covered by collateral.

Furthermore, the proceeds of the sale of Noden and Queen – and eventually Lensar – could easily surprise on the upside.

We are not pharmaceutical experts but our emphasis is on downside protection, and at the current price, investors can take their chances on this stock while setting a reasonable time limit on their holdings (18-24 months).