Developing billion-dollar blockbusters is the Holy Grail of all biotech companies, but investors can be left owning a company that's a fraction of its former self when patents on these drugs expire. Investors in PDL BioPharma (NASDAQ:PDLI) may be reminded of this risk soon -- patent protection on drugs accounting for more than 80% of its revenue has recently come to an end.

Although PDL BioPharma is providing financing to biotech companies in a bid to offset its looming sales drop-off, those deals aren't likely to generate enough revenue to maintain its current dividend pay-out. As a result, investors have cut PDL BioPharma's share price in half over the past year. What can investors learn about patent risk from PDL BioPharma? Find out in this healthcare segment of The Motley Fool's Industry Focus: Healthcare podcast.

A transcript follows the video.

This podcast was recorded on March 9, 2016. 

Kristine Harjes: Our third and final risk is patent risk. So this is even farther along in a drug's life, when it actually hits, maybe, the end of its commercial useful life.

Todd Campbell: Right, and I think a great example of this, we actually had one of our listeners write in about questions on this stock, so I'm glad that we're talking about it today, is PDL, symbol PDLI. PDL gets the vast majority of their revenue in royalties on patents that they own on monoclonal antibodies for some of the best-selling drugs in the world, drugs like Avastin. Highly complex, expensive drugs that are multibillion-dollar blockbusters, and they're just sitting back, raking in cash. And as a result, they pay one of the highest dividend yields out there. However, the patents have all expired on most drugs, and now, as a result, PDL doesn't expect to get any meaningful revenue from those patents after this quarter.

Harjes: Yeah, thank you to Aaron in Oklahoma City, who wrote in asking about PDLI. He says that it popped up on a screener for him with these really impressive financials, and was just kind of wondering what else there was to this story. And, I think, this is a really good way to paint the picture of what happens when patents expire. You could have a really awesome revenue generator, and then it just dries up when generic competition comes in. 

Campbell: Yeah, in this case, you're right, Kristine -- we're talking about over 80% of PDL's revenue. And it's just going to disappear.

Harjes: Yeah, exactly. One question I do want to address with patent risk is, whether or not you can trust what the company itself says? Maybe not so much for PDLI, but any sort of drugmaker that says, "Oh, don't worry about it, we've got all these additional patents covering us through 2020," or whatever year.

Campbell: Yeah, we've seen that a lot more with biotechnologies. Biologics are complex to manufacture, and a lot of people are arguing, "Hey, we've got method of use patents, we've got all these other things that could protect them, and plus, it's complex, and generic drugmakers aren't going to be able to craft identical versions of it." Take everything with a grain of salt. Don't ever underestimate generic drugmakers' ability to overcome some of these hurdles and obstacles. So, I think what you have to do is, you have to look at it and say, "Okay, what do I think after reading through the SEC filings, after looking at these companies' drugs and who's challenging whom, what is my risk in this regard?"

Harjes: And, I'll also throw it out there that, you could have it go the opposite way, too, where the branded drug actually does way better than you'd expect when generics enter the market. The best example I can think of this is Copaxone from Teva Pharmaceutical (NYSE:TEVA).

Campbell: Yeah, that was a really interesting story. Part of that was because they had created a longer-lasting formulation that required fewer doses than the generic that was approved. So, theoretically, if a new dose gets approved by the FDA by the generics, then maybe you see Teva's sales slip off in that.

Harjes: Yeah. It's almost starting to seem like, the more different aspects of risk you think about, the more complicated it gets. And some of these are really, really difficult to actually put an expected value on. I know Gaby, on her show, the Monday financials edition of the show, talked a little bit about forecasting and how frequently analysts miss estimates hugely, and this is definitely something that occurs in biotech and healthcare as well, where it's pretty difficult to measure exactly what the level of risk is in all three of these things we've talked about: the trial failure, the commercial failure, and the patent risk. So, Todd, ultimately, what's the best way to mitigate all of these risks?

Campbell: Diversification. I mean, you need to make sure you're not betting the farm on any one particular biotech company. You can also reduce your risk by focusing on companies that have been there and done that. You look at large-cap companies like Celgene and Gilead that rake in billions of dollars in sales and have tremendous amounts of money and financial flexibility that they're plowing back into their R&D budgets. That's a way to mitigate your risk, too. Then maybe sprinkle in some of these more clinical-stage companies that pose more risk. But don't expose yourself too broadly to them, because we've seen with Celldex and MannKind and PDL, potentially, share prices can drop.

Harjes: Yeah, and that's also a really good way of learning the industry first, getting your feet wet before you start to go smaller-cap, more niche-y players. So, yeah, I think that's really good advice.

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