Combining nice dividends with a growing industry that comprises roughly one-fifth of the nation's GDP should make for an attractive stock -- in theory. Unfortunately, the theoretical doesn't always translate well in the real world.
While there are quite a few solid dividend stocks in the health care sector, not all of them are as good as they might seem. In fact, some of them might be downright scary. Here are two health-care stocks that could have investors shaking in their boots over the next few years.
Mayan calendar deja vu
Sky-high dividend yield? Low payout ratio? PDL BioPharma (NASDAQ:PDLI) checks these items and more off an investor's list. The company's 7.8% yield ranks as one of the highest in the entire stock market. Its payout ratio of 41% is quite attractive. Unfortunately, PDL's situation is reminiscent of the Mayan calendar hoopla from last year. The difference with PDL is that when its calendar ends, that means it's really the end.
PDL BioPharma receives essentially all of its revenue from licensing drugs that have patents that expire at the end of 2014. The company expects to continue receiving some revenue through 2016. Unless new revenue sources are found, however, that will be the end of the road. Its stated plan is to liquidate or sell the business if significant new revenue streams don't materialize.
At this point, it doesn't look likely that sufficient revenue generation will happen. PDL has made a few deals recently, but none seem to hold promise for high-dollar returns.
Hopes for one potential pathway to new profits were lowered last year. PDL licensed an antibody to Eli Lilly (NYSE:LLY) for a potential treatment for Alzheimer's disease. However, Lilly's solanezumab failed to meet primary endpoints of two late-stage studies in 2012.
Lilly has embarked on another phase 3 study of the drug targeting patients with mild forms of Alzheimer's. If that study achieves success and the drug is ultimately commercialized, PDL will receive royalties for over 12 years afterward. However, even if that scenario unfolds perfectly, the royalty payments wouldn't be enough to keep PDL anywhere close to current revenue levels.
Big shoes to fill
AbbVie (NYSE:ABBV) doesn't have quite as dire of an outlook as PDL BioPharma, but there are enough uncertainties in the days ahead to make investors fearful. For now, the company continues to perform well with its Humira growth engine. However, that engine could begin sputtering in the next few years as the anti-inflammatory drug loses patent protection in 2016.
The problem for AbbVie is that it currently relies on Humira for more than half of its total revenue. AbbVie counts seven other significant drugs in its lineup, but only one of them saw sales growth last quarter -- Androgel, with a whopping 3.4% year-over-year increase.
Humira's $9.3 billion in sales makes for some big shoes to fill. Could drugs in AbbVie's late-stage pipeline fill those shoes?
Let's assume that multiple sclerosis drug daclizumab, developed with Biogen Idec (NASDAQ:BIIB), gains approval. Analysts estimate peak annual sales at $500 million on the high end. AbbVie splits profits equally with Biogen, so the drug would probably only gain $250 million per year at most.
Multiple myeloma drug elotuzumab represents peak annual sales potential of around $300 million. Elagolix could hit yearly sales of $800 million for treating endometriosis. The drug also is in a phase 2 study for uterine fibroids. Success with that indication could eventually bump total peak sales for elagolix to $1.5 billion per year. Parkinson's disease gel Levodopa/Carbidopa could generate as much as $1 billion annually.
That leaves one final late-stage drug to consider: AbbVie's hepatitis C combo. This drug combo boasts the greatest potential of all, with some analysts estimating $3 billion in annual sales. However, the company has plenty of competition in the hep-C market. The fast-paced development created by this rivalry has already thwarted projected sales for other drugs.
For example, Vertex Pharmaceuticals (NASDAQ:VRTX) was on cloud nine back in 2011. Analysts predicted that its hepatitis C drug Incivek would hit peak sales of $5 billion. Fast-forward the clock to today. Incivek's sales for 2012 were $1.6 billion, but they're now dropping. Physicians and patients aren't going with the drug in anticipation of the next great thing. This same scenario could play out for AbbVie.
Even if we assume that AbbVie hits the jackpot with all of these drugs, the grand total comes to $6 billion. That's still 50% less than Humira's current annual revenue. The company still would need to pull a few rabbits out of the hat to avoid declining revenue.
AbbVie's 3.6% dividend and super-low 10% payout ratio look great right now and will probably continue to look attractive as long as Humira keeps rolling. However, even great dividend payments wouldn't be enough to compensate for share decreases in the event of any significant hiccups in the company's pipeline.
Should prospects for the future scare off investors from these stocks now? Not necessarily. Both companies are highly likely to keep paying solid dividends for at least the next couple of years. Both will probably hold their values pretty well for a while also.
The dangers come more into play as PDL BioPharma and AbbVie get closer to losing their important patents. Both companies' fortunes hinge on replacing revenue. Failure to do will be quite frightening for these two health-care dividend stocks.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Vertex Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. 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.