12:00 AM
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Aug 27, 2007
 |  BioCentury  |  Finance

Ebb & Flow

Activist investors enjoyed an immediate pop after PDL BioPharma CEO Mark McDade announced last week that he would resign by year end. The news boosted the shares $2.65 (13%) to $23.81 on the week, while the stock earned upgrades from two of the six analysts covering the company.

Hedge fund Third Pointhas been publicly calling for McDade to depart since April, while co-founder Cary Queen seconded that sentiment in May (see BioCentury, April 16 & May 14).

Third Point held 11.4 million shares (9.8%) at June 30. Queen holds the largest insider stake at almost 2 million shares.

The announcement came as the cardiovascular, cancer and autoimmune company said a three-month internal investigation into Third Point's many allegations against McDade found no evidence of improper personal conduct or a breach of fiduciary duty by the CEO.

McDade cited the "personal and professional toll" of the investigation as his reason for stepping down. L. Patrick Gage, who had been a director, will assume the role of executive chairman.

Queen told Ebb & Flow that a "sale of the company is a very viable possibility," even though the company is looking for a new CEO. Queen said he and other shareholders would consider an offer of $30 a share to be a "good outcome."

But it's not clear Third Point would see it that way. One of the fund's complaints was that McDade had allegedly engaged in secret discussions to sell the company for $32-$34 a share - an allegation PDLI's board found to be untrue.

In July, Third Point said it had presented its own analysis to the company's board showing it believed PDLI to be worth more than $40 per share(see BioCentury, July 23).

PDLI said it is conducting a corporate strategic review with Merrill Lynch. Based on recent takeouts of similarly sized companies for an average premium of 54%, PDLI would be worth about $36.57 a share (see "Taking Out PDLI")

But a final calculation promises to be more complex.

Analyst Jason Kolbert of Susquehanna, who upgraded from neutral to positive, valued a potential sale of the company's ESP Pharma businesses at about $630 million ($5.25 per share).

Separately, he noted that if PDLI maximized the value of the ESP assets by stopping sales of the unprofitable Retavase and Busulfex and halting R&D on the ESP products, the company could tack another $9 onto its shares.

This would be Kolbert's favored course of action. The analyst, who is working on a valuation of PDLI's pipeline, told Ebb & Flow he would rather not see the company become a pure R&D play.

Kolbert did attach a cash value of $1.8 billion to the company's royalty revenue stream ($15 per share) and estimated that trimming SG&A and R&D by 10% would add $10 a share. These values are non-additive since they reflect interrelated scenarios.

He noted that 40% of PDLI's R&D budget goes to preclinical projects and that SG&A expenses are greater than 70% of product sales, a ratio which far exceeds PDLI's peers.

Waiting room

GPC Biotech (FSE:GPC; GPCB) gained E0.11 to E8.21 in Frankfurt last week, and was up $0.46 to $11.32 on NASDAQ, after it restructured to wait for Phase III survival data for its Orplatna satraplatin cancer compound.

The company, which withdrew its NDA last month, trimmed its workforce by 46 (15%) to 270. The cuts came from the U.S. staff, with reductions in the company's commercialization, R&D and general and administrative groups. This still leaves 16% more than the 232 employees GPC had...

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