By Dr. George Huang
PDL Biopharma squandered its fortune.
PDL was one of biotech's earliest success stories... Its scientists developed techniques that made possible some of the most successful biotech drugs to date. Today, the company still fetches more than $300 million per year in royalties from top-selling cancer drugs like Genentech's Avastin and Herceptin.
But PDL management wasted most of its royalty income on compensation and ill-advised acquisitions. So back in 2007, investors revolted. They forced out the CEO and demanded a new corporate strategy from the board.
The board split PDL into two companies. The parent, PDL Biopharma (
PDLI), keeps all the royalty assets to distribute to shareholders. And the spinoff, Facet Biotech (FACT), keeps the drug pipeline and the antibody technologies.
I watched the spinoff closely, because I knew my FDA Report subscribers would have a chance to scoop up the shares at a significant discount. Here's why...
Institutional investors will often sell spinoffs without thinking. Certain mutual funds have market cap restrictions. Some can't hold unprofitable stocks. Other times, funds that track an index will dump spinoffs because the new company is not included in the index.
Whatever the reason, spinoffs tend to get sold off with no regard to price or value... which can create huge profit opportunities.
See, Facet held approximately $330 million of cash in the bank when my subscribers entered the trade. Yet, at $8 per share, it only sported a $200 million market cap. Not only did we pick up a stock trading at a 40% discount to cash, we also got a multiproduct pipeline and one of the industry's best technology platforms for free.
At the time, it was already the perfect setup. If shares simply traded back to cash levels, we'd make 40%. If Facet released positive results from any one of its drug candidates, we could double our money in a single day. But things turned out even better... We weren't the only investors who thought Facet was a bargain.
Last Thursday, large cap biotech Biogen-Idec offered $14.50 per share for Facet, a 60% premium over the previous day's closing price.
The bid may have been way over Facet's share price... but it was still a slap in the face. It represents only a tiny premium over cash and values Facet's lucrative technology and pipeline at zero. Facet's board took little time to rebuff the offer as "inadequate." And a revised offer near $20 per share is more reasonable. Regardless of the outcome, my FDA Report readers have already doubled their money.
I wouldn't get into Facet now... It's no longer the bargain it once was. But if you want to double your money in less than two months, look toward new spinoffs. You'll find 40 or 50 new opportunities each year.
One easy way to hunt down these names is to browse the holdings in the Clear Spin-Off Index (CLRSO). It's comprised entirely of new spinoffs prior to their graduation from "rookie" status (about two years).
This is your best place to find companies undergoing the same forced selling as Facet. You might even find a few names trading at a discount to cash.
Good investing,
George Huang
