by Jon Markman | June 4, 2012 11:08 am
Biotechnology has strangely been one of the best sectors this year, despite their risk, rising 14% as a group in 2012 through June 1.
Investors who wish to have exposure to the group in a relatively muted way should consider an intellectual property play called PDL BioPharma (NASDAQ:PDLI). It’s up around 10% in total return this year, in large part thanks to its high dividend.
Formerly known as Protein Design Labs, the $900 million company has patented a process to create humanized antibodies. These proteins are created specifically to target disease-related cells, serving to diagnose and treat a number of medical conditions.
Antibodies recently have become an important part of the new advanced targeted therapies that pharmaceutical companies are developing to help fight long-standing diseases like cancer. As an example, traditional cancer fighting drugs kill cancer cells, but also destroy healthy cells. Targeted therapies only affect cancerous cells and can be more effective than traditional chemotherapy.
At the heart of PDL BioPharma’s revenue stream is its Queen et al. patent portfolio that runs through 2014. It covers humanized antibodies, methods for humanizing antibodies and methods for producing these humanized antibodies. Scientists have been creating antibodies derived from mice to fight bacteria and viruses since the 1980s, yet these animal-based proteins can often be rejected by the human body.
PDL BioPharma’s technology allows for the humanization of mouse-derived antibodies by altering the binding regions of the protein onto a human framework. The technology generates annual sales of more than $17 billion on a plethora of drugs that treat cancer, eye diseases, multiple sclerosis and several other severe health conditions.
The most successful of these drugs — including Avastin, Herceptin and Synagis — are marketed by pharmaceutical firms like Genetech and Medimmune, but are all produced using PDL BioPharma’s antibody technology.
The company licenses its patented technology to other firms and receives royalty payments and a negotiated percentage of the future drug revenue stream, should it receive FDA approval. That’s what makes PDL BioPharma special and differentiates it from most biopharmaceutical firms: It derives a more predictable revenue stream rather than the volatile hit-or-miss nature of those companies that develop the drugs themselves.
Royalties are generated either as flat rates around 3% of total drug sales, or as a tiered rate based on whether the final product is made and sold in the United States or internationally.
PDLI initially was incorporated in 1986 as a pioneer in the humanization of antibodies, but in 2007 had a significant change in its strategic focus, shedding all its own drug product lines and research and development operations to focus on maximizing its licensing and royalty revenues.
The firm is run by president and chief executive John McLaughlin, who took over in 2008 after spending nearly a decade in charge of Anesiva Inc., another biopharmaceutical company. He came aboard during a time of transition for the company, and has successfully guided it to nearly 43% net income growth during the past three years.
With its primary royalty stream from its Queen et al. patent portfolio expiring in 2014, the company is actively engaged in seeking new royalties to acquire. The management team has expressed a desire to close a deal by 2013 at the latest.
Meanwhile, the company has a number of promising products in the pipeline, including Bapineuzumab and Solanezumab, which are used to delay the progression of Alzheimer’s disease, and Teplizumab, which focuses on treating type one diabetes. They are all currently in various stages of clinical trials, and with an aggressive search to acquire new royalty streams, the next couple years will be very instrumental for the future of the company.
In the interim however, PDL BioPharma pays a hefty dividend of 60 cents per share that amounts to a 9% annual yield, which amounts to a portfolio inoculation of sorts.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and a long-term investment service, Strategic Advantage. Check out his Top Stock for 2012 here.
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