It's no secret that dividend stocks are the foundation on which great retirement portfolios are built. Dividend payments not only provide a hedge that can help offset the downside an investor may experience during a stock market correction or global recession, they can also be reinvested back into a stock to compound and magnify your long-term gains. It also doesn't hurt that dividend stocks tend to attract more risk-averse, long-term-oriented investors, which has the positive effect of reducing volatility.
There are a lot of dividend stocks to choose from as an investor, but that's far from the case in the biotech sector. Out of 360 publicly traded biotech stocks, just eight (yes, eight!) have paid a dividend over the past year. Some biotech stocks, such as Gilead Sciences and Baxalta, recently began paying dividends, giving hope to income-seeking investors that other biotech companies will take the cue and begin paying stipends themselves.
Will these biotech companies offer dividends in 2016?
Today, we'll take a look at a handful of biotech stocks that could be in line to introduce dividends for investors in 2016. Understand that these are merely guesses at this point, since there's no concrete formula that outlines why one company would pay a dividend and another would not. However, if these drug developers do decide to begin distributing a percentage of their profits to investors, you can probably expect their valuations to see correlating boosts.
Why Biogen could begin paying a dividend in 2016: Look no further than relapse-remitting multiple sclerosis pill Tecfidera for both the positive and negative reasons why a dividend would make sense.
Tecfidera has become every bit the blockbuster that Wall Street expected. Its favorable safety profile relative to Aubagio and Gilenya propelled the drug to $937 million in sales during the third quarter, up 6% on a sequential quarterly basis. It's well on pace to generate in excess of $4 billion in annual sales. However, its growth is beginning to slow, and based on the tumble Biogen shares took following the company's Q3 report, investors are none-too-pleased with this slowdown.
The solution is simple: take its more than $3 billion in trailing 12-month cash flow and begin paying investors a dividend.
Why a dividend may not be in the cards: Of course, a dividend is far from a guarantee with Biogen. The company is in the midst of running studies for two high-risk, high-reward experimental drugs: anti-LINGO-1 and aducanumab.
Aducanumab is the company's exciting Alzheimer's compound that, in phase 1 studies, led to statistically significant improvements in cognition for early stage patients. Anti-LINGO-1 is the company's experimental next-generation MS therapy, and has demonstrated its ability to repair aspects of the central nervous system in studies. In theory, both have $5 billion-plus in peak sales potential if they breeze through phase 3 trials, but Biogen may be unwilling to show its cards (i.e. pay a dividend) before it has these results in hand.
Alexion Pharmaceuticals (NASDAQ:ALXN)
Why Alexion could begin paying a dividend in 2016: Alexion is a veritable growth machine thanks to Soliris, its ultra-rare disease drug targeted at paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome. Because Alexion's Soliris targets rare diseases, it's protected from competition -- and targeting rare diseases somewhat disincetivizes generic competitors from entering the market, since volume is where generic drug developers make their money.
Adding fuel to the fire, Alexion recently witnessed the approval of Strensiq in the U.S. for the treatment of patients with perinatal-, infantile- and juvenile-onset hypophosphatasia, and Kanuma in the EU for the treatment of patients with lysosomal acid lipase deficiency. In other words, Alexion is no longer solely dependent on Soliris, and also happens to be sporting close to $1.45 billion in cash and cash equivalents on its balance sheet.
Why a dividend may not be in the cards: On the other hand, a few factors could dissuade Alexion from even considering a dividend. Congress' calls for prescription drug reform over the last seven weeks could put high-priced drug developers like Alexion in the spotlight for all the wrong reasons. Soliris costs over $500,000 per year in the U.S. and is deemed to be well beyond the scope of affordability.
It's also possible that Alexion could be saving up its cash to further diversify its portfolio and pipeline. Soliris still accounts for practically all of Alexion's revenue, and is likely to do so for many quarters to come. Without minimal revenue diversity in its product portfolio, any chance of shareholders receiving a dividend may be put on hold.
Jazz Pharmaceuticals (NASDAQ:JAZZ)
Why Jazz could begin paying a dividend in 2016: Speaking of biotech stocks that are heavily dependent on a single drug but still reaping incredible rewards, Ireland-based Jazz Pharmaceuticals could use its strong annual growth in narcolepsy drug Xyrem to eventually reward its shareholders with a dividend.
Based on Jazz Pharmaceuticals' third-quarter results, Xyrem sales increased by 19% to $242.9 million. All told, Xyrem accounted for 71% of Jazz's third-quarter revenue. With so few effective narcolepsy drugs on pharmacy shelves, Jazz has used its specialty drug status to boost the price of Xyrem regularly over the years. Data from Bloomberg shows that Xyrem's per 1-milliliter dose price rose from $2.04 in 2007 to $19.40 in 2014, or an 841% increase.
On top of strong pricing power, Jazz's cash and cash equivalents totaled about $1 billion at the end of Q3. The company still has approximately $400 million in net debt after its cash and cash equivalents, but recent strength in Xyrem and hope for its pipeline, along with Ireland's exceptionally low corporate tax rate compared to that of the U.S., affords Jazz quite a few reasons to offer a dividend to shareholders.
Why a dividend may not be in the cards: Similar to the argument with Alexion above, Jazz's reliance on a single drug, as well as price increase, could raise some eyebrows with Congress actively weighing the pricing practices of select drugmakers. This isn't to say that Xyrem's 841% price increase is or isn't justified -- it just means that Jazz could very well become a target for prescription drug reform. If pricing controls of any form are instituted within the U.S., it could negatively impact drug developers like Jazz.
The other issue here is that Jazz seems to constantly be defending its Xyrem patents against generic competitors. If a generic version of Xyrem were to enter the market, it would almost assuredly devastate Jazz's top- and bottom-line. Until the company boasts more cash than debt it may choose to keep any discussion of a dividend on hold.
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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