2 Biotech Stocks That Won't Pay a Dividend Anytime Soon, and 1 That Should

Biotech dividends are allowing investors to pocket a nice chunk of change. Image source: Getty Images.

With the stock market generally range-bound, investors are increasingly looking for ways to shore up their income by purchasing dividend stocks.

Dividend stocks have a great track record over the long term, handily outperforming companies that don't pay a dividend. This is likely the case because only companies with sound long-term business models and outlooks can share a percentage of their profits with shareholders. Dividend stocks can also buffer shareholders against a downturn in the stock market, and they provide investors with an opportunity to reinvest their payout into more shares of stock, thus creating a virtuous cycle of wealth-creation known as compounding.

The biotech industry steps up its dividend game

One exciting development for dividend investors is that biotech companies are starting to reward shareholders with payouts, becoming serious candidates for income investors.

Amgen (NASDAQ: AMGN), the original biotech blue chip, first introduced a $0.28-per-quarter payout in the summer of 2011. Since then, however, it has grown its payout five times, by about 30% each time. Its current payout is now $1 a quarter, which is good enough for a market-topping 2.7% yield.

Image source: Getty Images.

Gilead Sciences (NASDAQ: GILD) also joined the dividend party after hepatitis C duo Harvoni and Sovaldi basically made it more money than it knew what to do with. Having generated around $20 billion in free cash flow in 2015, Gilead introduced a $0.43 quarterly dividend last year, which has since been bumped up to $0.47 per quarter.

Rising profits in the industry have led some investors to call on other big and profitable biotech companies to share the wealth, so to speak. However, not all strongly profitable biotech companies are in a position to pay a dividend, even if their cash flow suggests they could. Here are two healthfully profitable biotech giants that I don't believe will pay a dividend anytime soon, as well as one biotech stalwart that should probably consider rewarding patient investors with a quarterly stipend.

Don't expect a dividend out of these two biotech companies anytime soon

Even though Celgene (CELG) cranked out $2.3 billion in free cash flow over the trailing 12-month period, and its own forecasts call for revenue to more than double and adjusted EPS to nearly triple between 2015 and 2020, don't count on getting a dividend anytime soon.

Image source: Getty Images.

Celgene's management team has been clear about pursuing growth both organically and inorganically, which means additional acquisitions and collaborations could be on the table. Remember: Celgene may have four drugs capable of $1 billion in annual sales by 2017, but multiple myeloma drug Revlimid still accounts for about 60% of its sales. Even with nearly 10 years to go before Revlimid generics can fully enter the market, Celgene still wants to continue diversifying its revenue stream away from Revlimid.

As a refresher, Celgene acquired Receptos for $7.2 billion last year to get its hands on ozanimod, an experimental oral compound that has the potential for $4 billion to $6 billion in peak annual sales if it's approved to treat multiple sclerosis and ulcerative colitis. Celgene also has more than 30 collaborative partners, practically all of which have licensing terms that could result in development-, regulatory-, or sales-based milestone payments. Simply put, Celgene needs its capital to make bids for attractive companies or to pursue attractive licensing opportunities. There's no room for a regular dividend payment.

Thankfully, Celgene is still rewarding its shareholders with regular share repurchase agreements. Since 2009 it has rebought $15.2 billion worth of common stock, and it has $5.3 billion currently authorized for repurchase.

The other company whose shareholders shouldn't expect a dividend from anytime soon is rare-disease drugmaker Alexion Pharmaceuticals (ALXN).

Image source: Alexion Pharmaceuticals.

Unlike Celgene, Alexion doesn't have to worry about milestone revenue via collaborations. However, the two companies do have something in common: They're heavily reliant on a single drug. In Alexion's case, that would be Soliris, an enzyme replacement therapy designed to treat paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome, both very rare diseases. Soliris itself costs more than $500,000 per year on a wholesale basis. Alexion's task is to find ways to expand Soliris' label and to diversify its revenue stream away from Soliris.

Alexion made progress on this front in 2015 by purchasing Synageva BioPharma for $8.4 billion in order to get a hold of Kanuma, a lysosomal-acid lipase deficiency therapy that's been projected to top $1 billion in sales at its peak. But it's quite likely that Alexion will remain on the hunt for additional acquisitions that complement its pipeline and product portfolio. Paying out a dividend just wouldn't make sense for this $28 billion company, despite the $527 million in free cash flow it generated over the trailing 12-month period.

This biotech stock should seriously consider paying a dividend

On the other hand, Biogen (BIIB 2.95%) should give serious consideration to joining Amgen and Gilead by paying its shareholders a quarterly dividend.

Image source: Biogen.

A few years ago, Biogen couldn't be stopped. It had introduced Tecfidera, a revolutionary oral multiple sclerosis drug that was taking the market by storm. More recently, it had two experimental therapeutics, aducanumab and anti-LINGO-1 (also known as opcinumab), which looked like they could be next-generation treatments for Alzheimer's disease and multiple sclerosis.

Fast-forward to 2016, and things have changed -- and not in a good way. Tecfidera's growth is beginning to slow dramatically as competition in MS treatment has increased and its patient pool has largely been tapped. More importantly, SYNERGY, the company's highly watched midstage study involving opicinumab, failed to reach its primary endpoint in early June of improving physical and cognitive function for MS patients. Opicinumab may not be a complete loss based on Biogen's press release -- Biogen is expected to analyze the data and determine the next steps for the developing drug -- but the clear implication right now is that we can abandon hope that opicinumab will be a blockbuster.

This essentially leaves Biogen with aducanumab for Alzheimer's -- an indication that has an exceptionally high clinical-trial failure rate -- and strong pricing power thanks to its high market share in MS treatments. Wall Street anticipates that Biogen's growth rate could slow to between 4% and 5% in the coming years. Even with its stock getting pummeled and Biogen now trading at only 11 times forward earnings, it could take a regular dividend to attract long-term investors.

With free cash flow of nearly $3.3 billion over the trailing 12-month period, Biogen could probably devote around 15% of this cash flow to paying out a $2.50 annual dividend, which would be a tad over a 1% yield. If Biogen struggles to reignite its top line, then rewarding investors with a dividend would likely be a smart move.