Investors love dividends... and for good reasons. Historically, they've been hard to find in the biotech sector, but with Amgen (NASDAQ: AMGN) and now Gilead Sciences (NASDAQ: GILD) offering a dividend, investors have a few additional options.
Hopefully, more will come. We asked our healthcare experts to weigh in on the biotech they think is most likely to offer a dividend next. Read on to see why Dan, Sean, and Brian think Regeneron Pharmaceuticals (NASDAQ: REGN), Alexion Pharmaceuticals (NASDAQ: ALXN), and Celgene (NASDAQ: CELG) might be handing back some cash to investors soon.
Dan Caplinger: Most biotechs are reluctant to start paying a dividend as long as they have promising candidates to invest in internally. While it's a bit of a stretch to expect Regeneron Pharmaceuticals to consider a dividend right now, it could easily be in position to do so in the not-too-distant future.
Right now, Regeneron is getting nearly all of its revenue from sales of its Eylea drug, which treats various conditions including wet age-related macular degeneration and macular edema. Recently, though, the FDA approved the drug for diabetic retinopathy, which is a common eye disease among diabetics. While the indication applies to treatment for patients with diabetic macular edema -- which was already covered by a previous approval -- the FDA decision suggests the potential that Eylea has for even broader use.
Regeneron also has some strong candidates in its pipeline. Cholesterol treatment alirocumab could have billion-dollar sales potential, given the need to fight high cholesterol levels in many patients. Other treatments for rheumatoid arthritis and allergic diseases also have promise, and as their trials progress, Regeneron could end up with more free cash to consider a dividend. Regeneron investors shouldn't expect a payout right away, but somewhere down the road, it's a much greater possibility.
Sean Williams: Following Gilead, I'd suggest the next biotech company likely to begin paying a dividend to investors is Alexion Pharmaceuticals.
Alexion primarily focuses on rare and ultra-rare disease drugs, with Soliris being its lone drug approved by the Food and Drug Administration. Soliris is currently approved in two indications: paroxysmal nocturnal hemoglobinuria, an ultra-rare blood disorder that results in premature destruction of a patient's red blood cells, and atypical hemolytic uremic syndrome, an ultra-rare disease capable of damaging vital organs.
Because of its rare disease focus, Alexion is able to command top-dollar prices for its targeted medicines. In fact, Soliris is the highest-priced drug in the world, with an annual cost per patient of more than $536,000.
What makes Alexion even more attractive from an investment standpoint, beyond just its astronomically high price point, which leads to juicy margins, is that its rare-disease focus leads to little to no competition, and the potential for a long-term revenue stream even after Soliris' patents expire.
As of its latest quarter, Alexion ended with $1.96 billion in cash and cash equivalents, with $165 million in debt, resulting in net cash of $1.8 billion. In addition, during the past 12 months, it generated $640 million in operating cash flow. Furthermore, according to Wall Street estimates, Alexion's EPS is expected to double between 2014 and 2018, resulting in approximately $10.60 in EPS.
Even if Alexion were to continue to test Soliris in other indications and explore new therapeutic products, I don't see any reason why it couldn't afford a dividend payout ratio equal to around 20% of its EPS. This would leave ample coverage for research and development, allow the company the opportunity to make acquisitions as needed, and should still result in a growing pile of cash and cash equivalents.
Please keep in mind that this is nothing more than speculation on my part, but the next step in Alexion's evolution, with its revenue stream secure for many years, is to pay shareholders a dividend.
Brian Orelli: With two of the four big biotechs -- Gilead, Amgen, Biogen, and Celgene -- now offering a dividend, it makes most sense for one or both of the other two to follow suit.
Between Biogen and Celgene, I'm going to guess that Celgene is more likely to offer a dividend first because its management has been more willing during the last couple of years to use cash to repurchase shares.
Biogen has a buyback program in effect, but its goal is to offset shares issued to employees through option grants. With plenty of options for the money because Biogen's shares have been up substantially during the last few years, the company has sunk quite a bit of money into share repurchases. However, the buyback program is thought of more as employee compensation rather than management signaling it has nothing better to do with its cash. The company clearly feels it can increase EPS by spending cash on developing drugs to increase revenue and earnings rather than by repurchasing shares.
The same can generally be said of Celgene, too. The company is in no danger of becoming a slow-growing pharma in the near future, considering it has a goal of increasing adjusted earnings per share by 23% per year on average during the next five years.
The share repurchases are a clear sign that the company has a little extra money sitting around with nothing else to spend it on. At this point, share repurchase plans are the better option as these programs can be slowed down or shut off if better opportunities arise, whereas investors don't respond well to dividends that go away. At some point, however, the level of repurchases becomes so large that it makes more sense to return at least some of the free cash flow to investors directly.
It could be a couple of years before that happens, although I'll note that most investors -- myself included -- were a little surprised when Gilead started its dividend. Celgene and Biogen might feel pressure to follow suit and cave in to the desires of investors earlier rather than later.
Brian Orelli has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool recommends Celgene and Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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.