My original PDLI report has received a lot of attention lately, and an interested investor asked if it was ok to call me on the phone with some questions. Since I hadn't really looked at the company in the past month or two, I decided to download their recent materials and update myself on the situation.
First the good news, PDLI is meeting management forecasts. In some cases it looks like they're outperforming because they're recognizing MedImmune revenue as it comes in. But my optimistic scenario takes this into account, and so PDLI has been performing in-line with my optimistic scenario. There are also two stage III clinical trials for drugs that could potentially bring in significant revenue if they receive FDA approval, providing a boost to the upside scenario.
The bad news is that I uncovered an error in my model. To calculate the current share price, I discounted the value of next year's share price and then added in the $1 dividend received this year, with the terminal value equivalent to the leftover cash balance in 2013. However, when I dragged this formula into 2008, it included a large one-time dividend that current shareholders will not receive. Taking this dividend out results in optimistic and pessimistic valuations that average out to about where shares are trading today (if we use a discount rate between 10-12.5%).
I'm embarrassed that I made this mistake, but I'm glad that I eventually caught it. I'm surprised it wasn't caught sooner given the number of people I distributed this report to. In conclusion, it looks like PDLI is appropriately valued where it is today. Investors can expect a worthwhile rate of return, especially given the potential for upside surprises, but enthusiasm should be tempered by the MedImmune legal threat. In any case, I appologize for this mistake, and I'll continue to monitor the PDLI situation as it unfolds.