A Biotech Leader With an 8.5% Dividend Kicker

8 | By Michael A. Robinson

I was a hard-working journalist in the early 1990s – and the whole Human Genome effort was transforming biotechnology into front-page news – when the Oakland Tribune offered me a job as a financial writer.

When the editor explained that biotechnology would be one of my “beats” … well, I jumped at the chance.

It was one of the best career decisions I ever made.

Biotech was an exciting beat to work … and that was an exciting time to work it. So I immersed myself in my assignments. And that meant that I talked at length with patients, company executives, industry analysts, financiers, top researchers, and senior officials at the U.S. Food and Drug Administration (FDA), the federal agency that approves all new drugs sold in the United States.

A five-part series that I produced about a pioneering therapy for multiple sclerosis generated a lot of accolades and was one of my favorite achievements from the four years I spent on the biotech beat.

But the real benefit was in the insights that I gained, and the lessons I learned.

They’ve paid off for me in a big way through the years.

And now they’re going to pay off for you.

You see, I not only learned how the industry worked, how to identify future blockbuster drugs, and how to tell which companies have the firepower to survive clinical testing to become an actual revenue-generating company.

I also learned that one indicator in particular can show you whether or not a biotech has big-profit potential.

I’m talking, of course, about patents.

A biotech, you see, is no different than any other kind of high-tech firm: If it has enough patents, it can use them as a cash-generating machine.

I don’t mean it has to auction them off, like some troubled tech firms have been doing of late. A biotech with a hefty patent portfolio can simply license its technology to other companies. That brings in revenue without all the high costs – and big risks – of actually making the drug.

That’s where PDL BioPharma Inc. (NASDAQ: PDLI) comes in. It’s a leader in what’s now known as “humanized” monoclonal antibodies.

That leadership has paid big dividends for the company.

And it can do the same for you, too.

Based in Incline Village, Nev., PDL has several drugs on the market. But it’s been succeeding by letting Big Pharma do all the heavy lifting.

Consider that PDL has licensed its technology to such heavyweights as Roche Holding Ltd. (OTC ADR: RHHBY), Novartis AG (NYSE AG: NVS), Pfizer Inc. (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ).

As I see it, this is a great business model. For investors at this point, it pays to think of PDL as really more of a patent play than a true science firm.

Not that the underlying science isn’t great. It’s just that PDL’s main sales and profits stem from its relationships with much bigger firms.

PDL’s six main drugs bring in more than $300 million a year in royalty revenue. PDL refers to its portfolio as the “Queen et al patents.” They expire in 2014, pending changes to those products lines that could yield either new compounds or create new uses for existing molecules.

This is one of the reasons why PDL’s stock remains so low-priced and the fundamentals so appealing for at least for the next year.

With a market cap of about $1 billion, PDL trades at less than four times forward earnings, or about one-third that of the overall market.

And talk about high internal returns. It has a profit margin of an astounding 56%. Not only that, but it has a return on assets (ROA) of nearly 80%.

PDL certainly knows what to do with all that cash – it returns it to the shareholders. The stock pays an annual dividend of 60 cents a share, for a current yield of 8.5%.

A yield like that greatly reduces the risk of buying this stock. Think of it this way: If you held PDL for a year and lost 10% on the stock price you’d still almost break even.

It is a rare small-cap tech leader that offers such a strong dividend. Founded in 1988, the firm specializes in making hybrid antibodies. These contain a high degree of human cells.

The idea is to use these compounds so that they don’t trigger an immune response. At the same time, the drugs target cancer cells more precisely, which can be a more-effective way to treat this malady than by using strong drugs that also kill a lot of healthy cells.

In fact, two of PDL’s Top Three selling drugs target cancer. They are:

  1. Avastin, a tumor-starving therapy used as a first-line treatment with certain cancers that invade the colorectal system, the lungs and the kidneys.
  2. Herceptin, which prevents the over-expression of the HER2 protein found in breast cancer.
  3. And Lucentis, a compound that inhibits the growth of a protein that leads to the age-related eye damage that can cause blindness.

Now, as much as I like PDL’s business model, I do see some risks. The most obvious is the possibility of one of its drugs being pulled from the market for safety reasons. But this holds true for every member of the sector.

More to the point, the company has set itself up to generate new sales as its patents begin to expire. So, by far the biggest risk is seeing the stock price go down because the firm can’t add enough new revenue.

But just yesterday (Monday), PDL announced that that it’s projecting a better-than-expected $92 million in royalty payments during the first quarter. That’s up 19% from the year-ago quarter and easily eclipses the $86 million that analysts were looking for, says FactSet Research.

PDL gets the royalties based on the sales of its drugs by other companies in the prior quarter and says the increase comes from higher payments for the drugs.

Should you buy this stock now?

Well, this isn’t your typical “breakout” biotech.

But that’s not a bad thing.

As my biotech lesson demonstrates, the deeper the collection of patents a company holds, the more business options that it has. Those patents are like a business “moat” that can keep potential rivals at bay – enabling the patent-holder to generate some hefty profit margins.

So if you’re looking for a high-yielding play in the biotech/Big Pharma – and can accept a moderate level of risk – PDL could be a nice addition to your portfolio.

[Editor’s Note: If you have questions, comments or other thoughts you want to share, we’d like to hear from you. You can post a note below, or drop us a line at]

8 Responses to A Biotech Leader With an 8.5% Dividend Kicker

  1. Jinit Jani says:

    Hi Mike,

    Nice read. I invested in PDLI two years ago and it is making over 12% for me right now.

    However I am very worried about its patent portfolio coming to an end in end 2014. The Management has made it clear that while they are on the lookout for new revenue sources, liquidation remains an open option which they may discuss by the end of the year.

    Major research analyst have therefore downgraded PDLI for this reason, hence very low P/E multiple for the stock.

    So my Q to you is: Do you think PDLI will wind down soon after current patents expire?

    Thanks for your time.

  2. Walter Teufel says:

    I enjoy reading your articles but some I would like to print out, text only.
    Can it be done? I;m sure your IT dept can figure something out.


    • William Patalon III says:

      Dear Walter …

      Thank you for the input. It was actually a very timely comment.

      ERC is obviously still a fairly new newsletter. And we’re talking, even as I write this, about some adjustments that we want to make. So your suggestion is a good one, and is welcomed. I am forwarding it to our ecommerce team (which happens to be quite superb, I’m happy to report).

      Cheers, sir!

      William Patalon III
      Executive Editor
      Money Morning & Private Briefing

  3. Bill Kelbaugh says:

    Clean, straight forward, no games, no hoops to jump thru, no mis-leading headings that end up in 1/2 long videos for nothing in the end etc etc etc. I just moved you to the top and will consider you my best and main source. Please keep it up and don’t change.The wheel will always be round regardless of the hype to change it.

    • William Patalon III says:

      Dear Bill:

      Thank you very much for both the comments and the suggestions. They mean more than you realize. We read all of these comments — and I mean not just Michael (who reads them religiously, I assure you), but also the management team here at Money Map Press … and by “management team,” I’m talking about the folks who make the decisions that shape the products.

      Your comment was articulate and clearly had a lot of thought behind it. So I wanted to respond to you specifically, and let you know that I’ve forwarded it in an e-mail to all of the top folks here, meaning it will factor into all the ongoing discussions we have about this.

      And even though I was the one who responded, please know that Michael, too, read this and commented on it to me. (I didn’t want you to think he hadn’t seen it, either).

      As a longtime journalist, I care very much about our readers (Michael, BTW, has a career background that’s almost identical to mine, and carries the same feelings about his readers). We obviously want to make money here at MMP — so we can afford to keep providing the services we offer — but we also want to create and publish products that our readers look forward to, value highly, and feel thrilled to receive.

      So by all means, please keep your comments coming. Don’t be afraid to offer constructive comments on stories, reports or on the directions we take. Ask questions you may have about investment trends or concepts. And even make suggestions.

      Thank you again for taking the time to post such a well-conceived comment. And may good fortune follow you for the rest of this year … and beyond.

      Respectfully yours;

      William (Bill) Patalon III
      Executive Editor
      Money Morning & Private Briefing

      P.S. If you don’t mind me saying so (I couldn’t help but notice), you have a great first name …. lol….

  4. RPL says:

    I own PDLI but am very nervous with their dividend. Having just lost a major legal battle I wonder if other companies might try the same legal suit. If they decide to liquidate what value would you put on their stock?

    • Michael Robinson says:

      Hi RPL,

      This answer is also for Jinit, who posted a comment earlier. The truth is no one knows what’s going to happen when the Queen et al patents expire in 2014. That’s why the stock is so cheap and offers such a huge yield. That’s why I mentioned that as a big risk in the story.

      I would urge you to go to the company’s website and get a copy of the March 2013 update for investors. That is the document to go by at this point. You will find the 37-page report on the website under News & Resources. Follow the link on the left hand side of the page under Company Presentations.

      The report makes it clear the company is looking for products it can license for new sales streams. It also spells out out a few possible business relationships that may work out. However, the company says that if it can’t find attractive terms on new deals it will repay its debt and use excess cash to buy back shares or pay dividends. If all else fails, the firm will wind up operations in 2016.

      By the way, you can hear comments from CEO John Mclaughlin along these lines posted on the Web. He’s talking about the firm’s 4th quarter earnings and addresses some questions on the future of the the firm and its fat dividend.

      Again, go to the PDL website. Look for this one under Investor Relations then the link on the left Events and Presentations. Seeking Alpha also did a report on those comments that you can find with a Web search.

      Hope that helps,


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