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This Biotech Winner Yields 9%

06/06/2011 8:00 am EST


Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

A technology permitting the deployment of animal-derived antibodies in human patients feeds PDL BioPharma’s rich royalty stream, writes Bryan Perry of Cash Machine.

The very phrase "royalty stream" is sweet music to high-yield income investors.

Owning a business that derives its income from licenses and patents requires little overhead or headcount. It's even more compelling when that company pays out a phenomenal yield, and where the next three quarters of dividends have already been declared.

PDL BioPharma (PDLI) is just that stock, and is our way to up our health-care exposure with a leading biotechnology company that derives almost all its revenue from a portfolio of patents it owns and licenses to major drug companies.

PDLI pioneered the humanization of monoclonal antibodies, modifying the protein sequences of animal-derived antibodies for use in human patients. This enabled the discovery of a new generation of targeted treatments for cancer and immunologic diseases.

The company's primary assets are its antibody humanization patents and royalty assets, which underpin licensing agreements with the likes of Roche/Genentech, Novartis (NVS), Elan (ELN), BiogenIdec (BIIB), Pfizer (PFE), and Johnson & Johnson (JNJ).

PDL's technology has been incorporated into antibodies to treat cancer, eye diseases, arthritis, multiple sclerosis, and other health conditions, with aggregate annual sales of almost $20 billion.

PDLI gets the bulk of its royalties from sales of Avastin, Herceptin, and Lucentis, all sold by Genentech, which is now part of Roche. It also gets royalties for Tysabri, which is sold by Elan. Avastin and Herceptin are cancer drugs, while Lucentis treats macular degeneration, and Tysabri addresses multiple sclerosis and Crohn's disease.

Royalties Power 9% Yield
On March 8, PDLI said it expects a boost in revenue during the first quarter, on a mix of higher revenue from royalties and a patent settlement. The company expects revenue of about $83 million, which would mark a 34% boost from $62 million during the same period a year prior. First-quarter revenue will include $10 million from a patent settlement.

Meanwhile, royalty revenue will rise 17.8% to $73 million. PDLI rang up $345 million in revenue for 2010, guiding to $385 million for 2011 and $421 million for 2012.

Earnings per share were 89 cents for 2010, and are estimated to be $1.17 for 2011 and $1.40 for 2012. This is just a very solid 10% top- and bottom-line growth story.

The company declared 2011 dividends of 60 cents a share, paid in 15-cent increments on March 15, June 15, September 15 and December 15. At the stock's Friday closing price of $6.58, the annual yield on PDLI is 9.1%, thanks to a rising royalty stream that fully supports the payout.

As noted earlier, money flow into the biotech sector is accelerating, and most of the leading names are trending nicely higher as a result. The (since topped) Valeant Pharmaceuticals’ (VRX) $5.7 billion all-cash bid for Cephalon (CEPH) was the latest bullish jolt to the sector where mergers and takeovers are always a possibility.

PDL BioPharma’s stock has responded to the latest set of financials, favorable closure of litigation, upbeat guidance by management, and the declaration of dividends for 2011. The outlook for the rest of 2011 and 2012 appears solid.

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