Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

PDL BioPharma: a High Dividend-Paying Biotech!

|Includes:BIIB, ELN, JNJ, LLY, PDL BioPharma, Inc. (PDLI), PFE, RHHBY

PDL BioPharma (NASDAQ:PDLI) is a very unique biotech company owns a portfolio of valuable patents that bring in royalties from licensed products. It's predecessor was Protein Design Labs which pioneered the humanization of monoclonal antibody technology in the 90'. Many of the humanized antibodies turn out to be blockbuster drugs for the treatment of cancers and a host of other previously untreated diseases. The most notable marketed drugs that licensing PDLI's technology are Avastin and Herceptin from Genentech/Roche (OTCQX:RHHBY), and Tysabri from Elan (NYSE:ELN) and Biogen (NASDAQ:BIIB). These drugs are so successful on the market, PDLI pulled in over $300 million of royalties from its licensees last year alone. PDLI's stock closed at $6.37 on 3/26/10, which is ~32% off its 52 week high of $9.32. I will do an analysis to see if it's a good opportunity to accumulate PDLI's shares.


Company history and financial analysis
Protein Design Labs started out as a drug discovery company, but gradually it sold its commercial products and finally spun-off its R&D operation as Facet Biotech (FACT) in December 2008. After this dramatic metamorphosis, PDLI emerged as a technology-holding company which manages its patent portfolio and license agreements. It's a highly profitable company with 2009 revenue of $318 million and less than 10 employees.

 

To enhance shareholder value, it pays sizable “special” dividends. In 2009, it paid three dividends totaled $2.67 for a yield of ~30%. For 2010 it plans to pay two dividends of $0.5 each, at current price of $6.37 that's a yield of ~15%. Below is a table highlighting last year’s key numbers:

 

 

Q1

Q2

Q3

Q4

Rev($M)

62.6

125.9

71.4

58.3

Ope Inc ($M)

57.9

120.3

66.2

52.7

Net Inc ($M)

37.5

77.2

46.4

28.6

Ope Cash ($M)

27.7

75.7

29.4

54.2

Dividend

 

$0.5/S ($60M)

$0.5/S ($60M)

$1.67/S ($200M)

As you can see, PDLI enjoyed an unbelievable ~60% net profit margin, and generated ~$180 million of cash among which ~$120 million was paid as dividends. The Q4 dividend of ~$200 million was paid from a $300 million securitization transaction.

Future dividend yield
Going forward, I believe the company will be able to pay a similar portion of itsoperational cash flow as dividends. Since its key patents will expire in 2014, PDLI is expected to receive royalties until around 2015-16. I’ll do a calculation to estimate total potential dividend payout in the next several years.

 

 

2010

2011

2012

2013

2014

2015

Rev($M)

~350

~380

~420

~460

~510

~560

Net Inc ($M)

~210

~220

~250

~270

~300

~330

Dividend ($M)

~120

~130

~150

~160

~180

~200

In the last five years PDLI’s revenue had a CAGR of ~24%. For my above calculation, with a conservative CAGR of ~12% PDLI will be able to generate revenue of ~$2.7 billion with net income about ~$1.6 billion. Assuming a dividend payout ratio of ~60%, total dividend can amount to ~$1 billion, which is about $8/share using current outstanding number of shares (~119 million). This will leave $600 million cash more than enough to pay down current net debt of ~ $400 million.

Potential risks and opportunities
This is a highly-profitable business that still has some upside potentials. The management is actively seeking new licensees, and some current licensees have late-stage product candidate may be approved fairly soon. These include Solanezumab and Bapineuzumab for Alzheimer’s disease developed by Eli Lilly (NYSE:LLY), Johnson & Johnson and Pfizer (JNJ, PFE) respectively. Of course, shares may be depressed further due to discontinuation of licensed products, which is very unlikely. In my opinion, the downside risk is really limited. This represents a rare high-income-generating stock for the next 5-6 years.

 

 

 



Disclosure: No position at time of writing, but intend to accumulate at <$6 levels!
Stocks: PDLI, RHHBY, ELN, BIIB, LLY, JNJ, PFE