Biotech finance specialist PDL Biopharma (PDLI) has been suffering a prolonged market thrashing that's driven its stock price down about 75% over the past three years. Over the same period, Johnson & Johnson (JNJ 1.49%) stock has kept pace with the buoyant broad-market S&P 500 index.
If PDL Biopharma selling has gone too far, a turnaround could lead to market-beating gains. Should investors ignore J&J's relative safety in favor of the riskier value play?
Let's have a closer look at these unique healthcare stocks to see which comes out ahead right now.
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Arguments for PDL Biopharma
This company has had an extremely tough year. Until recently, it was able to pay investors a juicy dividend with profit derived from patents covering some of the world's best-selling drugs. However, the Queen et al. patent family expired at the end of 2014, and revenue derived from the patent family plunged to just $15.0 million in the third quarter last year, from $119.2 during the same period a year earlier.
PDL Biopharma has made some progress reducing its dependence on the once-lucrative royalty stream from the Queen patents, but nowhere enough to offset the loss. Third-quarter revenue came in at just $53.6 million for a 57% year-on-year decline for the period.
Last July, PDL Biopharma committed $107 million to an equity stake in Noden Pharma and exclusive worldwide rights to a hypertension medication branded Tekturna in the U.S. and Rasilez everywhere else. In 2015, the drug generated $154 million in sales while marketed by Novartis, although during the three months ended in September, PDL recorded just $14.1 million in total product revenue.
Investors will want to keep their eyes open for the first full quarter of Tekturna sales. Achieving or surpassing the high-water mark set by the drug's previous owner could help the stock bounce back somewhat. Further ahead, reinstatement of the dividend it scrapped last year could provide another boost.
Arguments for Johnson & Johnson
In many ways, the world's largest healthcare company is the polar opposite of PDL Biopharma. Remicade is its best-selling product by a mile, but the $6.97 billion in sales it generated last year comprised just 9.7% of the company's enormous top line.
In the quarters ahead, investors will want to keep an eye on Remicade sales. Late last year, Pfizer launched Inflectra, the first domestically-available biosimilar version of the megablockbuster. Biosimilars have been digging into international sales of the drug for years, but Remicade generates the majority of its sales in the U.S.
At a 15% discount to Remicade's U.S. list price, Inflectra will almost certainly pressure its sales. The behemoth has a good chance of more than offsetting the losses with new products emerging from its late-stage pipeline. The company boasts three of the world's 15 most highly valued drugs expected to reach pharmacy shelves this year. The FDA is reviewing applications for guselkumab as a potential new psoriasis treatment and the rheumatoid arthritis candidate sirukumab. If approved, the pair is expected to generate a $2.3 billion in combined annual sales by 2022.
A bit further out, apalutamide is an interesting prostate cancer candidate that could add another $1.5 billion to J&J's top line by 2022. The company intends to submit applications for treatment of early-stage prostate cancer later this year.
Running the numbers
At its beaten-down price of around 2.1 times trailing earnings, PDL Biopharma looks insanely cheap. If successful commercialization of Tekturna restores some confidence in the company's otherwise dismal-looking future, there could be some gains ahead.
Before you jump at PDL's stock, though, you should consider the $150 million in convertible notes it issued late last year to refinance an existing debt. In a nutshell, those notes could be converted into shares that would heavily dilute your share of any future profits, driving the stock much lower.
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Johnson & Johnson shares offer a nice 2.7% dividend yield at recent prices that you can reasonably expect to continue marching upwards well into your retirement. It's been 54 years since the company went more than a year without raising its dividend payment, and it's managed to increase adjusted earnings for an outstanding 33 consecutive years.
At 20.2 times trailing earnings, shares of Johnson & Johnson aren't exactly cheap, but they're far less likely to lead to losses over the long run. That's makes it a much better buy than PDL Biopharma right now.
