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3 Biotechs That Don't Pay Dividends -- but Could

By Keith Speights – Nov 22, 2016 at 3:03PM

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Celgene, Biogen, and Regeneron have what it takes to join the dividend club. But should they?

Biotech stocks aren't generally known for their dividends. There are a few exceptions, but as a rule most biotechs either don't have the ability to reward shareholders with dividends, or they need the cash to fuel additional growth. However, some biotechs could easily pay dividends if they wanted to, even though they don't do so right now. Put Celgene (CELG), Biogen (BIIB 0.10%), and Regeneron (REGN 0.80%) at the top of the list.

Image source: Getty Images.

Growing earnings like crazy

The most important prerequisite for a company to pay out dividends is having the earnings to do so. Celgene checks that box and then some. The biotech generated earnings of $1.57 billion in the first nine months of 2016.

Even better, Celgene appears in great shape to keep those earnings coming at even higher levels in the future. The biotech expects to increase its earnings by an average annual rate of 23% over the next few years, thanks largely to continued strong performance from blood cancer drug Revlimid, autoimmune disease drug Otezla, and a solid pipeline.

Celgene has never paid a dividend, so what has the company been doing with its extra cash? Last year, Celgene spent $7.2 billion to buy Receptos. That was probably money well spent, since the deal brought ozanimod into Celgene's pipeline. The experimental multiple sclerosis and ulcerative colitis drug could reach peak annual sales of $4 billion to $6 billion if approved. 

So far this year, Celgene hasn't made any big acquisitions. However, the biotech did use over $2 billion to buy back shares. Celgene also spent nearly $700 million on collaborations with other biotechs.

Spin-off on the way

Biogen made even more money than Celgene in the first nine months of the year, pulling in earnings of over $3 billion. Most of that amount came from the biotech's multiple sclerosis franchise, which includes blockbuster drugs Tecfidera and Tysabri.

Unlike Celgene, however, Biogen might not enjoy great earnings growth over the next few years. Sales for its interferon product Avonex are dropping enough to offset gains for Tecfidera. Wall Street expects annual earnings growth of less than 9% over the next five years.

The biotech has used a relatively small amount of cash -- just shy of $350 million in the first three quarters of 2016 -- to buy back shares. By far the biggest use of Biogen's $2.9 billion in cash flow was to pay taxes. The company spent $1.3 billion in the first nine months on income taxes.

Biogen plans to spin off its fast-growing hemophilia franchise into a separate entity in 2017. That transaction should add to Biogen's cash stockpile (including cash, cash equivalents, and marketable securities) of $7.4 billion. What will the company do with its money? More acquisitions seem likely, but a dividend isn't out of the question.

Promising new drugs 

Regeneron delivered the strongest third-quarter earnings growth of all three of the biotechs on our list. The biotech reported a 32% year-over-year increase in adjusted earnings per share. Regeneron posted net income during the first nine months of 2016 totaling $642.4 million.

Eye disease drug Eylea continues to perform well, although its sales growth appears to be slowing some. Still, Regeneron should be able to count on solid revenue from Eylea for years to come. 

The bigger story for the biotech, however, comes from its newer drugs. Sales for Praluent aren't impressive yet, primarily because payers have made reimbursement for the cholesterol drug more difficult. Regeneron and partner Sanofi (SNY 1.82%) expect results from a major cardiovascular outcomes study to be announced by early 2018. Those results could help convince payers to loosen their purse strings and make Praluent the success many think it will be.

Regeneron and Sanofi also have a pipeline candidate that could be a winner. Experimental rheumatoid arthritis drug sarilumab was rejected by the Food and Drug Administration (FDA) because of issues at Sanofi's manufacturing facility. However, those issues should be resolvable.

Regeneron also has high hopes for Dupixent. The FDA should announce its decision on priority review for the drug in treating atopic dermatitis by March 29, 2017. Another late-stage study for Dupixent as a potential treatment for asthma is also in progress. Should the drug gain regulatory approval for both indications, it could achieve peak annual sales of up to $3 billion. 

These newer drugs, combined with continued strength for Eylea, should allow Regeneron to increase its cash position of nearly $2.9 billion (including cash, cash equivalents, and marketable securities). As is the case with Biogen, it seems likely that Regeneron could go on a shopping spree. The biotech could easily afford to initiate a dividend if it chose to do so, though.

Could versus should

I don't doubt that Celgene, Biogen, and/or Regeneron could pay solid dividends. They have the earnings power and the cash flow to make it happen. That doesn't necessarily mean that they should pay dividends, though.

In many cases, the best way to return money to shareholders is through stock buybacks. Investors have to pay taxes on dividends, but they get the benefits of share repurchases without the downside of paying taxes. Also, pouring cash into strategic acquisitions and collaborations could be the better way to increase shareholder value for the next few years for each of these biotechs.

If I had to pick which of these biotechs is most likely to initiate a dividend in the not-too-distant future, it would be Celgene. The company is in great financial shape to be able to establish a dividend program.

As a Celgene shareholder, though, I'd be perfectly happy if the company chose instead to buy some smaller biotechs that increase earnings growth even more than projected. Dividends are great, but it's the total return that matters the most.

Keith Speights owns shares of Celgene. The Motley Fool owns shares of and recommends Biogen and Celgene. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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