Biogen: healthy choice for up, down markets

11/24/2008


  Recent Price
$44
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
15
  Shares (millions)
294
  Long-Term Debt as % of Capital
15%
  52-Week Price Range
$78.57 - $38.04

Biogen Idec’s ($44; NASDAQ: BIIB) product picture is clear: one new and promising drug, two older treatments still growing sales, and a broad, well-funded pipeline. The investment picture, on the other hand, is less clear. Indeed, most biotech companies call on both patients and investors to accept a healthy dollop of risk.

From our perspective, Biogen’s upside potential is more than worth the risk. The company expects 15% revenue growth from each of its three major drugs over the next several years, and the company seems capable of generating that growth regardless of the state of the economy. Consensus estimates anticipate per-share-profit growth of 9% in 2009 and 7% in 2010, targets the company should be able to exceed. Biogen, at 11 times projected year-ahead earnings, is cheaper than most peers. The stock is a Focus List Buy and a Long-Term Buy.

Business breakdown
Biogen Idec was formed in a 2003 merger, though its predecessor companies were among the pioneers of the biotech field in the 1970s and 1980s. Drugs based on biological compounds tend to be expensive to develop, risky to use, and very profitable to produce. Biotech drugs often cause dangerous side effects. Such side effects have weighed on Biogen shares in recent months.

Tysabri is an effective treatment for multiple sclerosis (MS). Doctors are prescribing the drug in record numbers, and patient use has climbed 80% over the past year. So far this year, three patients taking Tysabri have contracted a rare and usually fatal brain infection. The news spooked investors and patients alike; Biogen shares have fallen 40% from July highs. Prescription growth slowed in the September quarter, though it remained high at 285 new patients per week, equating to annualized growth of 14,800 per year. In the June quarter, about 446 patients were added per week.

While only about one in every 6,000 patients using Tysabri for at least a year has contracted the brain infection — well below the one-in-1,000 warning on the drug’s label — prescription growth could continue to slow in the near term. However, the long view looks brighter. Tysabri faces limited competition, as few current treatments work well against MS and no rival drugs are likely to be approved before 2010.

While Tysabri builds up its patient base, Biogen can rely on steady growth from Avonex, a 12-year-old MS drug that generates roughly 60% of company sales. Avonex sales rose 26% in the September quarter. Foreign governments subsidize the drug’s costs (about $27,000 for a year’s supply) and have helped keep demand from eroding. Biogen’s third offering, Rituxan, treats rheumatoid arthritis and non-Hodgkin’s lymphoma. The drug also shows promise as a treatment for leukemia and lupus.

Growth in store
Over time, Biogen’s deep pipeline — 14 products in the midstage or late-stage clinical trials — should boost growth and limit the company’s dependence on a small number of drugs. Even among biotech companies, Biogen spends a lot on research & development. R&D spending has averaged more than 30% of sales since 2004 and should top $1 billion in 2008. An annual report for Biogen Idec Inc. is available from 14 Cambridge Center, Cambridge, MA 02142; (617) 679-2000; www.biogenidec.com.


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