Monday, March 15, 1999

Biogen, Inc.
(Nasdaq: BGEN)
Website: http://www.biogen.com
Phone: 617-679-2000
Price (3/12/99): $110 3/16


It wasn't too long ago that Biogen (Nasdaq: BGEN) was strictly a cooperative research firm. The company would research and develop new drugs, but would leave the marketing and distribution of its discoveries to other pharmaceutical companies. However, with Biogen's discovery of AVONEX, a treatment for multiple sclerosis (MS), the firm decided to switch gears, vertically expand, and become a fully integrated pharmaceutical company. Instead of sitting back and collecting royalties like it had in the past, Biogen created its own distribution network and is now actively selling its own products.

The new strategy has certainly paid off for the company thus far. AVONEX has been a smashing success since its release in 1996, and revenues at the company have more than doubled over the past two years. Profits and cash flow, not surprisingly, have also been positively affected by sales of the new drug. The company even produced enough extra cash to buy back 2 million of its own shares over the past year and a half, the first buyback the company had ever instituted.

With AVONEX sales continuing to post impressive growth, the company announced on February 22 that it intends to repurchase up to an additional 4 million shares of its stock. Also helping Biogen is the FDA's March 1 decision to limit sales of a potential competing drug. Serono Laboratories, a Swiss firm, did not clear the FDA's hurdle for selling Rebif, its own treatment for MS, in the U.S. With a would-be competitor out of the way, shares of Biogen have continued their skyward march.

While Biogen was sold down to as low as $41 3/4 in the late-summer panic of 1998, the stock's direction has been in essentially the same direction ever since -- up.


Founded in 1978 and based in Cambridge, Massachusetts, Biogen is a biopharmaceutical company involved in the development, manufacturing, and marketing of drugs for human use. Many of the company's early discoveries, including alpha interferon and a hepatitis B vaccine, are distributed by larger pharmaceutical firms such as Schering-Plough (NYSE: SGP) and Merck (NYSE: MRK). However, these days, the company's strategy is to sell its discoveries itself.

At the moment, the sole drug sold exclusively by the company is AVONEX, currently the world's most-used treatment for multiple sclerosis. After receiving FDA approval for widespread distribution in 1996, the drug is now selling at a $500 million annual rate. In the last quarter, roughly 74% of Biogen's sales were thanks to AVONEX. The balance of sales came from royalties on the company's older products.

Biogen is a member of the S&P 400 MidCap index.


Income Statement
12-month sales: $557.6 million
12-month income: $138.7 million
12-month EPS: $1.80
Profit Margin: 24.9%
Market Cap: $8557.8 million

Balance Sheet
Cash: $516.9 million
Current Assets: $694.1 million
Total Assets: $924.7 million
Current Liabilities: $131.0 million
Long-term Debt: $71.0 million

Price-to-earnings: 61.2
Price-to-sales: 15.3


One way to have found Biogen would be to look at the sales trend of AVONEX. The drug has seen increasing usage in each quarter since its release, a significant sign of how well AVONEX is regarded as a treatment for MS. Even if AVONEX was equally effective as other drugs on the market, its reduced dosing frequency (weekly versus every other day) remains an attractive attribute, especially for a class of drugs that needs to be injected intramuscularly. With early and strong acceptance of the product in the U.S., it would naturally follow that the rest of the world would eventually approve and start using the product. AVONEX is now prescribed twice as often as the next most popular MS treatment.

Another bullish signal was the company's ongoing share buyback. With the costs of developing AVONEX far in the past, the drug has been the proverbial cash cow. This has left Biogen with some extensive financial flexibility, allowing the company to keep its share count low. Seeing a company purchase its own shares is often a bullish sign.

Another factor worth considering was the company's winning the National Medal of Technology for 1998, among the nation's highest scientific honors.


While Biogen has had extreme success with AVONEX, the company remains essentially a one-cow farm. With nearly three-quarters of the company's sales coming from only one compound, concerns about product diversification are entirely prudent. However, Biogen's single cash cow is rather fat and healthy, and promises to be alive through at least 2003, when the patent on AVONEX runs out.

Four years left on the AVONEX patent still gives the company plenty of time to harvest the market, but successful clinical trials of drugs in Biogen's portfolio will be needed to sustain the current valuation through the next decade. The company currently has drugs in Phase II clinical trials for treating lupus, edema, and psoriasis. Additional applications of AVONEX are also being studied.

While smaller on an absolute basis than many of its peers, Biogen currently earmarks roughly 30% of its sales for research and development. This compares quite favorably to Pfizer's (NYSE: PFE) roughly 15% and Merck's 12%. Whether these expenditures yield a marketable drug is always a crapshoot, but the chances appear good that Biogen will add another cash cow to its barn over the next few years.

Biogen's entire industry group, pharmaceuticals, is also quite an attractive industry these days. With the FDA's recently streamlined drug approval process, companies can recoup their research expenses much quicker. Moreover, the faster approvals can result in more time to sell the drug under patent protection. (The patent time-clock starts ticking when the drug is discovered, not when it is approved for sale, so a fast approval is advantageous to the company's profits.) And with an aging population, demand for all types of drugs is going to continue to increase for the foreseeable future. The group in general, and Biogen in particular, may trade at premium valuations, but there are some extremely valid reasons why the companies have been bid up.

In the short term, continued expansion of AVONEX will drive Biogen's stock. There are currently 55,000 patients using AVONEX, and the company's CEO recently said that they expect to see more than 100,000 patients taking the drug over the next few years. Acceptance may also get another push if the company's efforts with Inhale (NYSE: INHL) produce a form of the drug that can be inhaled.

At 61 times trailing earnings, some of this future growth has obviously been priced into the stock already. Nevertheless, Biogen is worth keeping an eye on, especially if some of the drugs in the company's pipeline pass the FDA's phase III trials.

--Paul Larson

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