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Friday, June 18, 1999

An Investment Opinion
by Warren Gump

Biotech Big Boy Biogen

As indicated previously in this column, I find biotechnology to be one of the most interesting investing opportunities available. While difficult to get your hands around the industry at once, it is possible to start to get to know various companies one at a time. Tonight, I'm going to spend some time looking at Biogen (NYSE: BGEN).

Over the past three years, Biogen pulled out of the research and development stage and onto the market as a product marketer with the 1996 launch of Avonex, a once-a-week drug that slows the progression of multiple sclerosis (MS). Because of this successful new product, company revenues have increased from $135 million (all related to royalties) to $558 million last year, representing compound annual sales growth of 43%. Avonex accounted for $395 million (93%) of that revenue growth. The company's earnings statement is even more attractive with earnings per share increasing to $1.80 from $0.08 three years ago. Analysts surveyed by First Call expect that number to rise to $2.61 this year as Avonex sales continue to rise.

Based on Q1:99 results, Avonex became the biggest MS drug in terms of sales and patients (over 60,000 worldwide). Continued growth could occur as more users adopt Avonex and usage spreads to new geographic regions. Biogen is waiting for approval of the drug in Australia, New Zealand, Turkey, and Central and Eastern Europe. While Avonex appears to now be the drug of choice for relapsing forms of MS, it does face competition from Schering AG's Betaseron, and Teva Pharmaceutical's (Nasdaq: TEVIY) Copaxone. Outside the U.S., the drug also goes up against Ares-Serono's Rebif. (Due to the "orphan drug status" of Betaseron and Avonex, Rebif will likely not make it onto the U.S. market until 2003.)

Further battles lie in expanding the usage of Avonex beyond relapsing forms of MS. The biggest fight appears to be in the market for secondary progressive MS, one that is smaller than relapsing, but still has substantial potential. Betaseron has received European approval for use in secondary progressive MS, but is still waiting to be get a thumbs-up from the U.S. Food and Drug Administration (FDA). Another competitor, Immunex (Nasdaq: IMNX), has recently filed to obtain FDA approval to use its Novantrone in the fight against secondary progressive. Biogen hopes that Avonex will help in the fight against secondary progressive MS, but it is still in the third (and final) phase of clinical testing.

While Biogen's strong operating results are impressive, continued growth is obviously expected from a stock trading at a price/earnings (P/E) ratio of 44x 1999 earnings expectations. As with almost all other biotechnology companies, it is important to get an idea of what is in the company's research and development (R&D) pipeline. The drug holding the most promise right now is Amevive (LFA3TIP), which is being tested against moderate-to-severe Psoriasis. The company just finished the second phase of clinical testing and is in the process of designing a phase three trial. Several other drugs are also in the pipeline, about which you can find information on the Biogen web site.

As someone without a medical degree and only a very limited understanding of biology, it is virtually impossible to be a judge of the effectiveness of any of Biogen's drugs. Instead, I have to rely on information that I read and hear (the Fool's message boards can be a good place to start). I also look at how much a company spends on R&D in both absolute dollars and as a percentage of revenue. Another helpful tool is spending a little time with the balance sheet to determine if the company has the financial flexibility to continue an aggressive R&D program, make strategic acquisitions, and partner on promising drugs coming from the pipelines of less financially stable companies.

Since 1995, Biogen has more than doubled its R&D spending from $87 million to $177 million. As a percentage of sales, R&D expenditures have actually fallen from 65% to 32%. This drop as a percentage of revenue should not be surprising since the company is now selling a product rather than just doing research and pulling in royalty revenue. To put this figure into perspective, Amgen (Nasdaq: AMGN) spent about 26% of sales on R&D last year, whereas Genentech reinvested 34% of its revenue in this line item. On a percentage basis, Biogen's spending on its pipeline appears to be in line with its peers. As the company's sales increase, the absolute dollar level should continue rising.

A strong balance sheet is critically important in the biotech world given the high cost of bringing new drugs to markets. I've seen estimates that the total cost to market (including the cost of failed trials) can run up to $500 million per drug. Obviously, only the strongest of companies can foot that kind of bill. At the end of the first quarter, Biogen was sitting on over $600 million in cash and marketable securities and debt stood at a paltry $60 million, indicating plenty of resources to expend on promising opportunities.

Having developed Avonex into a major cash flow generator, Biogen is now well positioned to fund its efforts to find and develop new drugs and an even more prominent role in this exciting industry. If you're at all interested in exciting companies in emerging industries and can stomach the stock price volatility inherent in such a situation, you might want to start getting to know this company a little better.

Call Your Boss a Fool.

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