PDLI
Business
PDLI has two revenue streams 1) Royalties (55%) and 2) Products (45%) but the stock trades more with Royalties because this revenue stream is much more valuable.
The company collects Royalties on 7 drugs that are on the market. These drugs use a PDLI patent technology called Humanized Antibodies.
| Company | Drug | Indication | Drug sales 2006 |
| Genentech | Herceptin | Breast Cancer | $1.9B |
| Xolair | Asthma | $557M | |
| Raptiva | Psoriasis | $140M | |
| Avastin | Colorectal Cancer | $2.4B | |
| MedImmune | Synagis | Respiratory | $1.0B |
| Wyeth | Mylotarg | Leukemia | $23M |
| Roche | Zenapax | Renal | $44M |
PDLI collects 3% royalties on all drugs except for Zenapax, for which it collects 15% royalties. There are another 40 drugs in development that use PDLI technology. Tysabri will be the 8th drug on this list. In March 2005, PDLI stock dropped 25% when Tysabri was pulled form the market.
PDLI also gets sales from products targeting hospitals.
| Drug | Treatment | Drug sales 2006 | |
| Cardene IV | Cardio surgery | $65M | |
| Retavase | Heart Attack | $55M | |
| IV Busulfex | Organ transplant | $15M | |
| Other | $24M | ||
Credit
I would use 250 over L for PDLI. The company has $284M in cash and $500M in debt The debt consists of $250M 2% converts due 2012 and $250M 2.75% converts due 2023 (2010 put).
PDLI is expected to be $27M FCF positive in 2006 after burning $11M in 2005. The credit is solid because of the company’s business model. PDLI collects a growing but steady revenue stream from royalties where there is no associated fixed cost. The company uses all of its cash on R&D but that cost is easy to cut back during bad times.
The biggest risk to the credit would be if PDLI makes an acquisition. The company acquired privately held ESP Pharma in early 2005 for $500M. All indications are that PDLI will not make another larger acquisition because it will take a couple of years to integrate the ESP.
Other risks include patent challenges to its technology or failures of one of its drugs. The company’s patent position is solid and should not be an issue. Failure of any one drug will not have a significant effect on its business because the company is diversified.
Volatility
PDLI stock could experience big moves in several ways. 1) Big move in biotechs 2) Sales upside/downside from drugs for which it collects royalties 3) Sales upside/downside of its own drugs 4) News on its pipeline drugs.
When Tysabri was pulled from the market in March 2005, PDLI was down 25%. In the past week, when the biotech index dropped 5%, PDLI dropped 8%. Because the business is diversified and contains very little fixed costs, most volatility events will probably not lead to a significantly wider credit.
On the downside, PDLI pipeline drugs are in Phase II development and will not have any volatility events until late 2007. Upcoming events include earnings on May 2 and analyst day on May 5.