It’s not often one hears the word “dividends” and “biopharma” in the same sentence, except maybe to point out that the two never seem to go hand-in-hand. Yet, there are (rare) exceptions to that norm.
One of those exceptions is PDL Biopharma (PDLI). Incredibly enough, PDLI currently boasts a dividend yield of 6.1%. Better still, PDL Biopharma is apt to keep paying solid dividends for the foreseeable future. Income investors looking to beef up their portfolio’s diversity may want to mull PDLI. Here’s a closer look at the details.
Big Dividends From a Biopharma Stock
PDL Biopharma is so unique that there’s not really a category for it within the investment world. The most relevant analogy would be to describe PDLI as a REIT (real estate investment trust) or an MLP (master limited partnership) for the pharmaceutical world. Though the company doesn’t enjoy the tax benefits of being a REIT, nor does it pass along the tax-filing work required of MLP owners, PDL Biopharma was built from the ground up as a machine that pays out the bulk of its income as dividends.
But how does a biopharma outfit do that? Unlike the most-storied of biotech companies seeking cures for cancer or diabetes — and spending heavily to do so — PDL Biopharma aims to own patents or royalty rights to a portfolio of cost-effective, established (or at least promising), and consistently-marketable therapies. Think harder-hitting drugs than aspirin, but less splashy treatments than blockbuster arthritis drug Humira or the once-highly-touted prostate cancer drug Provenge.
Examples of the treatments currently driving income for PDLI owners include Avastin and Herceptin. Avastin is a therapy for a handful of different cancers where prior treatment has not resulted in an adequate response. Herceptin is a drug used to treat certain forms of breast cancer.
More relevant to potential or current shareholders of PDL Biopharma is how Avastin has consistently produced revenue of more than $600 million per quarter for many, many quarters. Not only is it technically a blockbuster, it’s a cash-cow. Herceptin is also a consistent provider of cash flow, and though its quarterly sales aren’t yet as strong as those of Avastin (less than $500 million per quarter), its revenue is growing at a faster clip. While Herceptin sees its patent cliff approaching and Avastin isn’t too far behind Herceptin on the same patent-expiration road, both will be able to fund dividends for PDLI owners for a few more years.
The Flipside of Owning PDL Biopharma
While it’s an interesting business model, it’s not as if the strong dividends are perfectly protected. This outfit is just as subject to patent expirations as any other pharmaceutical company. Indeed, the bulk of its portfolio will have lost its patent protections by the end of this year. The fast-approaching patent cliff was so alarming, in fact, that the company mulled closing shop altogether rather than trying to continue its operation. The board opted to remain in business, however, and began seeking out new drugs it could use to drive long-term revenue — and dividends.
Although it can’t be said the company scored the same caliber of victory it scored when it first secured its current portfolio of drugs several years ago, PDL Biopharma has acquired royalty rights to Obinutuzumab and Solanezumab. The former is a therapy for leukemia, approved late last year as Gazyva, and the latter is a Phase 3 drug aimed at Alzheimer’s disease. While Solanezumab didn’t achieve its desired results in recent testing, it may still prove useful for patients with only mild cases of Alzheimer’s. If approved, PDLI would pocket 2% of the drug’s sales for a period of twelve years.
As another example, PDL Biopharma spent $240 million in October to secure the royalty rights to Depomed’s (DEPO) portfolio of diabetes drugs. Some are already being sold, and others are still in development. Whatever the case, the deal gives the PDLI royalty rights until it has pocketed $481 million in revenue from the agreement. That’s a 100% return on its investment, which is a solid ROI regardless of how long it takes to reach that figure.
A handful of other royalty deals have been made in recent months, and more are apt to be on the way.
Bottom Line for PDLI
While the patent expiration risks are clear and unavoidable, the company appears willing and able to diffuse them by adding cost-effective but marketable drugs to its portfolio as opportunities and cash become available.
The company’s willingness and ability to replace its aging drugs with new patent-protected treatments is an encouraging sign that the dividends aren’t going away. Granted, income could still be a little choppy at times for PDLI owners as PDL Biopharma continues to update its portfolio. But income investors should be able to tolerate that kind of volatility and occasional uncertainty in light of the bigger picture.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.