The JPMorgan Healthcare Conference just finished up in San Francisco and was arguably the most important event of the entire year for the health care sector. This is one of the rarest opportunities for biotechnology, pharmaceutical, and medical device companies to open up about where they've been and where they're headed, so it pays to take notice.
With dozens of companies presenting each day last week, it was veritably impossible to review each and every one. That doesn't mean, however, that there weren't other companies squarely in my sights.
PDL BioPharma (NASDAQ:PDLI) -- a unique royalty interest company that invests in drugs, diagnostics, and medical devices, and relies on patents from its antibody technology to earn revenue -- is an interesting company because of its 8% dividend yield. However, it's also rapidly approaching the patent expiration for a number of key drugs that it receives royalty payments from. Given its huge payout, and as someone who's always seeking big dividend stocks, I was very curious to see what PDL had to say about its current and future royalty stream.
As you might expect, CEO John McLaughlin was very adamant in pointing out his company's strong cash position of $160 million and his focus on improving shareholder returns. PDL has no research and development department, so its expenses are minimal with its focus solely on generating new royalty revenue streams.
Within the United States, PDL's royalty payments can vary wildly, anywhere from 1% to 3%, or even higher in some cases, depending on sales. Outside of the U.S., PDL's royalty interest deals net the company a flat 3%. This is an important point because numerous drug and device makers are pushing their manufacturing facilities abroad to reduce costs and avoid the recently implemented medical device excise tax. This move would be financial beneficial to PDL and its shareholders over the long term.
When talking about individual drugs, McLaughlin was quick to highlight strength in Roche's (NASDAQOTH:RHHBY) Avastin, Herceptin, and Perjeta. McLaughlin pointed out that Avastin's sales are rapidly moving abroad (once again, great for PDL), and recent data suggest additional indications could be in the offing. The excitement from Herceptin relates to its partnership with ImmunoGen (NASDAQ:IMGN) and its revolutionary targeted antibody payload technology. The drug, T-DM1, has sailed through clinical trials and could be the next big treatment for HER2-positive breast cancer. Perjeta is a new addition for PDL's portfolio as a first-line breast cancer treatment.
Equally, there have been disappointments along the way. Eli Lilly's (NYSE:LLY) solanezumab, an experimental treatment for Alzheimer's, failed to meet its primary endpoint, but may still have some clinical value (although we're talking years down the road). Lucentis' sales, a drug co-owned by Roche and Novartis (NYSE:NVS), have struggled with the introduction of Regeneron Pharmaceuticals' (NASDAQ:REGN) wet age-related macular degeneration blockbuster, Eylea, even after gaining an additional indication for diabetic macular edema.
The most pressing factor, however, is Avastin and Elan's (UNKNOWN:ELN.DL) Tysabri's imminent patent expirations in December 2014. McLaughlin attempted to calm investors by pointing out that drug stockpiles and the seven-month antibody development process should drag payments out until at least 2016. On the flipside, McLaughlin also couldn't assure investors that his company could remain a viable entity if new revenue isn't obtained. If this was the case, the company would be wound down, most likely in 2016.
Considering all that I heard from McLaughlin, I'm as confused as ever about PDL. It has made quite a few new royalty bets recently and additional indications from Avastin, as well as a manufacturing push overseas could go a long way to boosting its payments. On the other hand, if PDL is unable to replace the success of Tysabri and Avastin revenue in the next three years, we could be looking at a cessation of not only the dividend, but of the business itself. A lot rests on the success of Perjeta and T-DM1!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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