PDL BioPharma, Inc. (NDAQ:PDLI) shares moved up $0.73, or 4%, to $18.99 after Daniel Loeb's Third Point disclosed a 7.5% stake in the company and expressed disappointment and concern over the company's high rate of spending and significant underperformance. The Schedule 13D filing contained a letter urging the company to cut costs and not pursue additional acquisitions. Daniel Loeb also offered to work with the company to streamline the company's cost structure and asset base in an effort to allow the cash generating ability and value of the company to be developed and made apparent to shareholders.

Here's a sampling of what Daniel Loeb wrote in his lengthy letter to management:

We believe that the significant value inherent in the Company's product line, royalty revenues and R&D pipeline has been obscured by excessive overhead and apparently undisciplined research spending. We at Third Point have had substantial experience working strategically with healthcare companies to enhance value and we would welcome the opportunity to share our views and work constructively with you to help put the Company on the right track. We believe that, with our timely input, the Company should be able to reverse its significant underperformance.

I am certain that you and the Board share our consternation that since January 1, 2004, the Company's share price has remained flat versus a 50% increase in the biotech index (BTK). This is particularly troubling given that the Company has received approximately $400M of royalty revenues over this time period, largely attributable to several of biotech's fastest-growing products, including Genentech's Avastin and Herceptin. By comparison, Genentech shares have doubled over this time period.

Underlying our approach is our strongly held belief that PDLI's shares are significantly undervalued due to the market's worry that the Company is squandering valuable cash flow on undisciplined R&D spending as well as its concern that the Company will make another acquisition. We estimate that between now and the end of 2014, PDLI will generate close to $2.2B in revenues from its royalty stream. Discounting this back at the current cost of capital, we calculate that this revenue stream is worth $1.8B today, just slightly below PDLI's current market capitalization. In addition to these royalties, specialty pharmaceutical revenues should approximate $200M in 2007 and the Company has other valuable assets: an exciting, albeit slowly-progressing, product pipeline; undisclosed royalties that extend beyond 2014; approximately $430M in net operating loss carry-forwards; real estate and other assets that can be monetized; and a valuable antibody technology platform that should continue to generate new compounds over time ... Our preliminary analysis shows that PDLI should, with some cost-cutting, be able to earn $1.00 per share in 2008 and to increase that to $1.50 per share in 2009.

Many other investors have also expressed concern, recently recommending that the company put itself up for sale. This led to the company's implementation of a poison pill, preventing any hostile takeover of the company. Daniel Loeb said he understood the rationale behind the poison pill and reassured the company that he was not interested in pursuing a sale, but rather helping the company turn itself around through internal improvements. Third Point has a rich history of actively unlocking value in many of its investments, so this move makes PDLI a stock worth watching!

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