Description

Summary

I believe PDL Biopharma (PDLI or the “Company”) (PDLI - $2.22/share) is an attractive risk-adjusted long-investment at current levels, with a mid-teens to mid 20s% IRR over the next few years and minimal risk due to several locked in deals and an orderly liquidation.  After engaging with an activist late last year, the Company has done a good job of slowly monetizing assets, with only one key royalty asset remaining and a potential official plan of dissolution coming in the next six months.  Additionally, there could be even greater upside due to a large tax receivable the Company may get in 2021 from the CARES Act, as monetized assets have created losses that can be carried back against years in which the Company paid significant cash taxes.  Given the low risk and reasonable IRR, I believe this is an attractive investment in an absolute sense, but certainly a reasonable place to park incremental cash in a market that some believe to be expensive.  I expect that interim distributions will be meaningful and will be treated as a return of capital, deferring the gain and allowing investors to achieve long-term capital gains on the return. This write-up will be shorter than most, driven largely by the fact the thesis is relatively simple from here.

Why Does this Opportunity Exist?

• Smaller market capitalization, especially post the spin-off of Lensar in October and the distribution of Evofem shares earlier this year

• Lack of understanding regarding potential tax benefits

•  Is anybody paying attention to a company that has announced a bunch of deals, calls itself a “biopharma”, and has no real operating business?....

Business Description / Valuation

In case you are interested, there are previous VIC write-ups on the Company that can give you background on various assets that may remain.  In this case, much of the uncertain value of the Company is related to is Assertio patent portfolio which is up for sale and potential tax benefits related to the CARES Act.  I describe the likely paths forward for those assets below.  Before going there, below is a quick snapshot of how I see value today:

As you can see from the above, aside from a few royalty assets and taxes, much of the value here is certain. 

Assertio Royalty – This is the single largest piece of unknown value.  From what I can tell, this was being marketed and the Company is holding some reasonable line on value here, telling investors that they should hold them to book value.  As a reminder, these royalties on balance sheet represent the PV of expected cash flows using discount rates that range from 10-24% depending on the drug.  These marks are reviewed by third parties and have already been adjusted downwards recently for changes in the competitive landscape for the primary drug, Glumetza.  This is basically now just down to the discount rate of the buyer vs. the seller.  With that said, one alternative the Company is considering is to move this asset to a liquidating trust.  By doing so, the Company can collect on its cash with minimal overhead and proceed with a winddown of the rest of the organization.  The management team has also indicated that they understand that shareholders are willing to accept some discount to book value for cash today, so I would not be surprised to see the asset sold in 2021.  My low and base cases assume discounts to book value for the royalty assets that remain.

Taxes – Tax receivables represent another large source of value for the Company.  The CARES act allows for the carryback of losses in 2020 against gains over the preceding five year period, with the losses being offset at what was a higher corporate tax rate in the past.  Many of the Company’s transactions have occurred after 6/30/20, but as of 6/30/20 they were expecting roughly a $14mm receivable already.  The Company had invested a lot of capital into Noden, Wellstat and Lensar over time and I believe there will be substantial tax losses that could qualify for the CARES Act refund.  My base case estimate above is only $5mm higher than what they already expected to achieve at 6/30/20.  Lastly, it looks like there is plenty to go after from 2015 and beyond, assuming the losses are large enough.

Offsetting this potential receivable is the “uncertain tax liability” related to the audit from the California Franchise Tax Board.  PDLI would like to settle here to limit the amount that it might have to hold back in any plan of dissolution.

Conclusion

PDLI is an attractive risk-adjusted return liquidation investment.  Given the significant amount of value in cash and cashflows coming through already announced transactions, I believe interim distributions will be significant, increasing the IRR and allowing for a tax-efficient total return.

Risks

·         Increased time before dissolution plan formalized

·         Materially weaker sale of Assertio patents

Catalyst

·         Official plan of dissolution

·         Sale of Assertio patent portfolio

·         Clarity on amount of tax receivable