Staff Writer

Biotech companies, with their insatiable need for cash to support sky-high drug development costs, are not known for returning money to shareholders. Yet last month, PDL BioPharma Inc. used a dividend and Cardiome Pharma Corp. used a stock buy-back to do just that.

PDL and Cardiome are exceptions to the biotech norm: Both have milestone and royalty revenue streams bringing cash in without significant research and development to suck it back out. It's a situation more biotechs may find themselves in as the industry matures and more products reach the market. But Oppenheimer & Co. analyst Bret Holley said the moves by PDL and Cardiome each are special situations and "in no way signify a trend in the industry."

PDL earns royalties on antibody products sold by Genentech (now part of Roche AG), including Avastin (bevacizumab), Herceptin (trastuzumab), Lucentis (ranibizumab) and Xolair (omalizumab). While the biotech once plowed much of its earnings back into its own pipeline, shareholder pressure led PDL to spin out its R&D division as Facet Biotech Corp. and pass its royalty income directly to investors. PDL paid out $59.7 million in dividends in April and again in October, and last month it monetized a percentage of its royalties with a $300 million securitization transaction to allow an even bigger dividend. (See BioWorld Today, Oct. 29, 2009.)

Holley noted that PDL is now a "financial instrument" rather than a biotech - the company has no operations and will dissolve when its royalty-generating patents expire.

Even so, PDL is one of the only biotechs - or former biotechs - ever to hand out a dividend. Ongoing dividends are nearly unheard of in the industry, and it's rare even to see special dividends, such as that issued last week by Neurobiological Technologies Inc. upon its liquidation or the one issued a few years ago by Ligand Pharmaceuticals Inc. after it sold off its commercial operations.

Slightly more common are share repurchases, which generally are used by companies that "have excess cash - more than they could spend on R&D," said John Fitzgibbons, partner with ThinkEquity LLC. Big, profitable biotechs also see buybacks as a way to boost earnings per share and get a nice return, particularly if the stock is undervalued, Fitzgibbons explained.

Thus Biogen Idec Inc., Illumina Inc., Celgene Corp. and others have taken the approach recently.

But most biotechs are not profitable and "need to hold on to every dollar," said Josh Muntner, managing director of health care investment banking for ThinkEquity. That's why last month's $27.5 million buyback from unprofitable Cardiome raised a few eyebrows.

Holley noted that Cardiome is near profitability: The company's atrial fibrillation drug Kynapid (vernakalant) is undergoing a confirmatory Phase III study and should be on the U.S. market by 2012, and a European application is under review. (See BioWorld Today, Aug. 12, 2009.)

But Holley added that "the principle of a share buyback is the same whether they are profitable or not" - buying bargain stock is a good use of excess cash. Cardiome's partners are covering most of Kynapid's development costs, and while the company does have some early R&D programs, they're not particularly cash-intensive. With upwards of five years worth of cash in its coffers and more soon to come from milestones and royalties, Cardiome's buyback was a good investment.

A few other unprofitable biotechs have approved share repurchases this year, including Adeona Pharmaceuticals Inc. (formerly known as Pipex Pharmaceuticals Inc.) and AspenBio Pharma Inc. Those moves were made in an attempt to both take advantage of and improve what appeared to be rock-bottom stock prices.

A few years ago, unprofitable Nabi Biopharmaceuticals did a $65 million share repurchase after reaping $185 million from the sale of its biologics division. Shareholders pushed for an even more aggressive buyback last fall, fearing that Nabi's high cash balance and low stock price might attract unwanted acquisition interest,

Although more biotech companies are likely to reap significant cash rewards from asset monetization and royalties as their products mature, Muntner predicted that most will reinvest their money in R&D rather than returning it to shareholders, and both dividends and buybacks will continue to be relatively rare.