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PDL BioPharma (PDLI)Stock (Drug Manufacturers - Other Industry, Pharma & Healthcare Industry)
 It is relatively easy for a biotech company to make a mouse or chicken antibody[1]. However, these animal antibodies can cause severe histemic (allergic) reactions when used in humans. As a result, humananized antibodies, which are trickier to produce, are preferred. PDL licences the technology to produce humanized antibodies to other pharmaceutical and biotech companies in exchange for royalty payments and often a cut of the drug's future revenue stream if it proves successful. Since 2002 PDLI's revenues have averaged year-over-year growth rates of more than 40%, most of which (85% in 2007) was a result of royalty payments from pharmaceutical companies that use PDLI's antibody humanization technology to make treatments for cancer and infections diseases.[2] PDLI used to have drugs of its own, but in 2007 it sold all of its product lines to focus on research and development of a new antibody drugs.[3] Companies that develop new drugs themselves generally have higher margins than companies such as PDLI that license research and development technology to someone else. However, developing drugs is also riskier and more costly because so many drugs fail in clinical trials. PDLI's humanization technology has always been the company's cash cow, but the patent for PDLI's proprietary antibody production process expires in 2014, and the company will need to develop new therapeutic antibodies by that time in order to replace the revenues currently earned through licensing fees and per-unit royalties on each unit sold of drugs produced with its technology.[4] It currently has just six drugs in early phase development (two in partnership with Biogen Idec (BIIB)) as replacements to the ones sold in 2007, an insignificant number given the low yield rate on new drugs in the pharmaceutical industry.[5] [edit] OverviewPreviously organized as a Delaware corporation in 1986 under the name Protein Design Labs, Inc, PDL BioPharma (PDLI) today is a biopharmaceutical company focused on the development of antibodies in oncology and immunologic diseases. The company generates royalties through licensing agreements based on its humanized antibody technology, and is developing a proprietary pipeline to treat serious life-threatening diseases.[6]
In 2007, revenues amounted to $259 million, a 4.0% increase from 2006.[7] Revenue growth has been slowing down over the past few years. The revenue growth rate was 57.2%, 65.0% and 44.0% in 2006, 2005 and 2004 respectively. However, operating costs has outpaced revenues in each of the past five years. Total operating costs amounted to $284 million in 2007, a 7.7% increase from 2006. [8] Operating cost growth has been slowing over the past few years; it was much higher at 27.2% and 34.2% in 2006 and 2005.
PDLI has not had a profitable year in its history. In 2007, the net loss was $21 million, which was much smaller than the net loss of $130 million in 2006. This is due to a significant sale of some of its assets in 2006.[9]
A significant portion of PDLI’s annual revenues is derived from the royalty payments it receives from its proprietary antibody humanization technology.[10] In 2007, royalties constituted 85% of its annual revenues. The proportion of royalties to total revenue has remained consistently high over the years, ranging from 74% to 87% in the past five years. After divesting assets in 2007, PDLI does not have any products that it sells directly. Specifically in April, PDLi announced that it would distribute royalty revenue that the firm receives on drugs from companies like Genentech (NYSE: DNA), AstraZeneca (NYSE: AZN), and Wyeth (NYSE: WYE), in that process, create a new publicly traded stock for PDLI Stockholders. The Company also revealed that it would distribute almost all of the revenue it receives from these royalties as dividends to shareholders of the new. As a result of the sales of a few of its patented drugs, the company paid the first special dividend of over $4 per share to holders last month.
The revenue stream from royalty payments is coming under threat in the foreseeable future - the patent has been challenged, but regardless of the legal outcome it will expire in 2014. [13] Unless PDLI develops other products to provide new revenue streams, the entire business model of the company will be under question. Overall, In 2008's first quarter, PDLI's royalty revenue grew at a rate of just under 3% Y-O-Y, and for next year PDLI management believes they will exceed an 8% growth rate. [edit] Shifting Focus Towards Discovery and Development[edit] Sale of AssetsDuring the last year, the company has undergone a strategic shift in its corporate direction. On 28 August 2007, PDLI announced its intention to sell its commercial and cardiovascular segments to focus on the development of antibodies for oncology and immunologic diseases. IV Busulfex product-related assets were sold to Otsuka Pharmaceutical Co., Ltd. for $200 million in cash[14] while Cardene, Retavase and Ularitide product-related assets were sold separately to EKR Therapeutics, Inc. for an upfront payment of $85 million, up to $85 million in development and royalties on certain future product sales.[15] Both transactions were completed on March 7, 2008. On March 31, 2008, PDLI and GMN, Inc., a wholly owned subsidiary of Genmab concluded the sale of the Minnesota manufacturing facility and related operations for total cash proceeds of $240 million.[16] In light of the recent asset sales, PDLI announced a special cash dividend of $4.25 per share. [edit] Intended RestructuringPDLI has announced plans to eliminate approximately 250 employment positions over approximately one year and undertake other substantial cost cutting measures to align its operations to its new corporate focus of antibody discovery and development.[17] [edit] Trends & Forces[edit] Growth in the Oncology Market Boosts PDLI's RevenuesAccording to reports by MarketResearch, the oncology market forecasts show an increase from $18 million in drug-related revenues in 2004 to over $195 million in 2012.[18] Factors like an aging population and an increased understanding of the genetics of cancer are fueling this growth. As cancer treatment becomes more lucrative and more common, PDLI benefits because more companies will license its technology to make treatments. PDLI earns revenues from up-front licensing fees as well as royalties on each unit of drugs sold. [edit] The Company's Future Growth Is Contingent on Successful Development of New ProductsAs with most pharmaceutical companies, the performance of PDLI depends on its ability to develop successful products. This is especially crucial for PDLI as it has recently divested its commercial division to focus on development-stage biotech. The ability of PDLI to successfully develop a new blockbuster antibody is questionable, considering it has not successfully developed a single drug since its inception (the product lines sold in March 2007 were acquisitions rather than in-house creations). Recently, management announced that Phase III trials for ulcerative colitis antibody Nuvion have been discontinued due to the drug's lack of efficacy. In addition, future growth is entirely dependent on the sale of new products once its antibody humanization technology patent expires in 2014. In the meantime, PDLI intends to use the stable revenue flows from the royalties and licensing fees from its Queen patent to fund the antibodies that are under development in its pipeline. [edit] Pending Expiration of Queen’s Patent Causing Uncertainty about Future Revenue StreamsThe Queen patent refers to the series of patents protecting PDLI’s proprietary humanized antibody technology and which is currently the source of most of its revenues. PDLI is highly dependent on royalties as a source of revenue, and these will cease to exist when its antibody patents expire in 2014 and the royalty stream ends. Moreover, there has also been notices of opposition filed against the two humanization patents based on the Queen technology, meaning the patent might not make it to 2014 - intensifying pressure on PDLI to succeed in the discovery of a new technology..[19] [edit] Competing Human Antibody Technologies Will Continue to Erode its Market SharePDLI's antibody humanization technology is one of the methods that can be used to develop antibodies for human use. It would be classified under the broad cateogry of Recombinant Protein Engineering. However, other techniques have been developed over the years. Antibodies have also been developed using Genetically Engineered Mice, Diversity Libraries and Cellular Production methods. There are at least 24 companies that claim to have technology for generating human or humanized antibodies.[20] While PDLI's technology remains in demand, these competing processes threaten to erode its market share and reduce its royalty revenue stream in the short term, while presenting issues for PDLI's long term development of an alternative to its Queen patent technology as market saturation makes discovery of new methods increasingly difficult. [edit] Uncertainty regarding Management and Future Direction of the FirmIn the past, PDLI used to own manufacturing plants, making and selling the antibodies in its portfolio. Turmoil in the past decade led management to attempt to sell the company, but since the firm is not profitable it could not find a buyer. The company ended up adopting a compromise solution, in which it sold off its products and the manufacturing facilities, but held on to the patent rights for the humanization technology..[21] This leaves management with the challenge of redefining PDLI as a discovery and development company that would produce new blockbuster antibodies. However, it should be noted it has never succeeded in developing a single antibody on its own, as all of its past products were licensed or acquired. It also not not have a permanent CEO and is currently searching for one.[22] Until the search is concluded, a great deal of uncertainty remains. [edit] CompetitionMore than 24 companies claim ownership of technology for generating human or humanized antibodies. These include:
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