Poor Management + Activist = $$$

PDL BioPharma is a biotech company that’s been earning – and squandering – big royalties on its antibody humanization patents, especially from Genentech. PDLI gets millions of dollars in royalties from Avastin and Herceptin, two of Genentech’s biggest, sexiest drugs, but you wouldn’t know that from the performance of its stock. Management at the company has made some bad decisions over the years and turned an otherwise excellent company into something you wouldn’t want to touch with a 10-foot pole.

But Third Point, which owns 8.8% of PDLI, is pushing for a seat on the board to start extracting some value from its investment. Third Point is the same group that got Western Gas Resources to sell out to APC last year at the peak of the natural gas market. As far as Third Point is concerned, PDLI, which now trades at $20 and change, should be worth $39 to $59.

PDLI managed to grow its royalty revenues from $52.7 million in 2003 to $184 million last year. Its royalty contracts with Genentech last until 2014, and Cramer says those alone are worth $16 to this $20 stock. The problem is that the company has taken this money in the past and spent it like a drunken sailor. It spent $500 million buying ESP Pharma, which Cramer thinks didn’t make a whole lot of sense. It spent $200 million to $250 million in capital expenditures building out its own manufacturing facility when it thought it was three years away from having its first approved drug – and if that wasn’t bad enough, it turned out to be eight years.

Third Point thinks that PDLI can earn $1 a share in 2008 and $1.50 a share in 2009 if it only imposes some financial discipline. And that’s not considering the strong Phase II data on its multiple sclerosis drug Dacluzimab, or the fact that this company seems to spend twice as much as any other biotech on the same amount of R&D and clinical trials – spending that should be easy to cut.

Cramer thinks the stock would be up more off the Phase II data and Third Point’s recent statements, but Fidelity was liquidating a huge position, and when FIDO sells, you can’t go higher.

Bottom Line: Cramer thinks PDLI is a stock with $4 of downside and $20 to $40 of upside. That means the stock is worth a serious look – you just don’t see that kind of risk/reward very often.

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