Looking to invest in a stock with a super-high 7.4% dividend yield with an attractive 36% payout ratio? How about a stock that meets these criteria and grew earnings by more than 27% last quarter? PDL BioPharma Inc. (NASDAQ:PDLI) could be your dream stock.
On the other hand, PDL could cause you to have nightmares. Nearly all of the company's revenue comes from royalties from licensing patents that expire in December 2014. Consider this ominous statement in the company's 10-K SEC filing: "If we are unsuccessful in acquiring additional new sources of revenue sufficient to sustain our business, we will liquidate or sell our business." Ouch.
Is this seemingly great dividend stock worth the risk? Or should investors avoid PDL BioPharma like the plague?
Wheeling and dealing That 10-K filing hit on the key to PDL's success -- acquiring new sources of revenue. The company doesn't lack for funds to find new sources. PDL counted cash, cash equivalents, and short-term investments totaling over $258 million as of the end of last quarter.
That figure continues to be padded by nice growth from products benefiting from PDL's licensed patents. The company earns royalties from Roche's sales of Avastin, Herceptin, Xolair, Lucentis, Perjeta, and Kadcyla. Avastin sales grew 13% in the last quarter after receiving regulatory approvals in the U.S. and Europe for new indications.
Biogen Idec Inc. (NASDAQ:BIIB) also pays PDL BioPharma royalties for Tysabri. Sales for the multiple sclerosis drug soared 38% year-over-year in the second quarter.
With that money disappearing not long from now, PDL has turned to other avenues. Just this week, the company announced the purchase of royalties and milestone payments for type 2 diabetes products licensed by Depomed Inc (NASDAQ:DEPO) for $240.5 million.
This deal allows PDL to receive all royalties and milestone payments for drugs including Glumetza, Janumet, and Invokana. Janumet is the biggest blockbuster of the bunch. Merck & Co., Inc. (NYSE:MRK) sold more than $1.6 billion of the drug last year. Sales of Janumet-XR could top $2 billion. But the royalties that PDL will make for Janumet are only in the low single digits percentage-wise.
Depomed's license arrangement with Santarus, Inc. (NASDAQ:SNTS) for Glumetza could prove more lucrative for PDL, at least in the short run. Santarus will pay 32% of revenue through the end of 2014 and then 34.5% after that. Generic versions of the drug are expected to reach the market in 2016, however, which will likely cause a drop in revenue.