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Is PDL BioPharma, Inc. a Buy?

Keith Speights, The Motley Fool

PDL BioPharma, Inc. (NASDAQ: PDLI) ranks as one of the most intriguing stories in the biopharmaceutical world. Once a dividend king with a patent portfolio that included some of the biggest-selling drugs in the world, such as Avastin and Herceptin, PDL now doesn't pay a dividend at all, and its lucrative patents have expired. Between mid-2014 and the end of 2016, the company lost nearly 80% of its market cap.

But PDL BioPharma appears to be on the rebound now in a big way. Over the past 12 months, the stock is up more than 40%. Is PDL BioPharma now a buy? Here are the arguments for and against the stock. 

Question mark made of stacks of cash

Image source: Getty Images.

The case for PDL BioPharma

Which healthcare stocks would a top artificial-intelligence system buy? That doesn't have to be a hypothetical question. The AI Powered Equity ETF (AIEQ) launched by Equbot is powered by IBM Watson, one of the most famous AI technology platforms around. And the AI system ranks PDL BioPharma as one of its top five healthcare picks.

While the ETF doesn't reveal details behind the AI system's decisions, it's not too hard to see why PDL BioPharma could be attractive. PDL's market cap currently stands near $440 million. The company reported a cash stockpile, including cash, cash equivalents, and short-term investments, of $532 million at the end of 2017. Yes, PDL BioPharma has more cash than the market says the company is worth right now. 

The company also appears to be moving past the devastating impact of the expiration of most of its Queen et al. patent royalties. For the first time in several years, PDL BioPharma grew year-over-year revenue and earnings in 2017. 

One significant growth driver for PDL BioPharma is its majority ownership of Noden Pharma, which markets blood pressure drug Tekturna. The Noden deal, made in 2016, was PDL's first foray into acquiring a commercial-stage asset that could generate income from product sales.

PDL BioPharma has a solid history of finding income-generating opportunities. If the company can make more deals like the Noden transaction, the stock's rebound should continue.

The case against PDL BioPharma

So why shouldn't investors buy PDL BioPharma stock? For one thing, it will be much harder to post more year-over-year revenue and earnings growth in 2018. 

The biggest factor behind PDL's top- and bottom-line success last year was an increase in the fair value estimate for PDL's Depomed (NASDAQ: DEPO) royalty asset. In 2013, PDL acquired rights to receive royalties and milestone payments on type 2 diabetes products licensed by Depomed. These products include Glumetza, Janumet XR, and Invokamet XR. However, this was only a one-time benefit.

It's also important to note that these diabetes products could face challenges. Teva Pharmaceutical launched a generic version of Glumetza in the U.S. during 2017. Merck has encountered headwinds for Janumet because of competition from newer SGLT-2 diabetes drugs, with Johnson & Johnson experiencing a similar story with Invokana and Invokamet. This could mean lower royalties are ahead for PDL BioPharma.

Over 11% of PDL's total revenue still comes from its Queen et al. patents, specifically from the licensing of Tysabri to Biogen. However, Biogen notified PDL in November 2017 that the supplies of Tysabri that had been manufactured prior to patent expiry has been depleted in the U.S. and would soon be used up in other countries as well. That means royalty revenue for PDL will significantly drop this year and will go away after the first quarter of 2019. 

Finding good revenue opportunities is also tougher than it might seem. PDL recently abandoned plans to acquire Neos Therapeutics after the two parties couldn't agree on terms for a deal.

But what about PDL BioPharma's valuation? Although the company does have a cash stockpile larger than its market cap, remember that PDL also has long-term debt totaling more than $200 million. PDL's net cash position is well below its market cap.   

Final verdict

Is PDL BioPharma stock a buy? Despite continuing to face serious challenges, I think buying a small position in the stock could pay off over the long run. The company has moved past the worst damage from expiration of the Queen et al. patents. Its stock is definitely cheap. And although the Neos acquisition didn't pan out, PDL will make more deals in the future.

Having said that, PDL BioPharma certainly isn't my favorite biopharmaceutical stock. There are several other picks that have more solid growth prospects with attractive valuations. But for value investors with a long-term perspective, PDL BioPharma looks like an intriguing bargain buy.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool is short shares of IBM. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.