Biogen Idec Inc's Fortress Is Pricey Real Estate

Biogen is building an incredible MS business, but expectations are very high today

Feb 13, 2014 at 6:30PM

Outside of orphan drugs it is difficult for drug companies to establish wide moats and essentially dominant a therapeutic area, but Biogen Idec (NASDAQ:BIIB) is well on its way to doing just that in multiple sclerosis. Not unlike Gilead in anti-viral therapies (particularly hepatitis C) and Novo Nordisk in diabetes, that strong market share has translated into healthy cash flow and robust premiums for Biogen's shares.

Growth today? Not a problem
Biogen Idec's fourth quarter earnings reflect a healthy, strong business with very good growth characteristics. Revenue rose 39%, with product sales up 50% on strong Tysabri sales (up 45%) and a very solid result in Tecfidera (up 39% sequentially to almost $400 million). While the gross margin slipped a bit on a higher mix of product sales, adjusted operating income rose 59% and operating margin topped out over 40%. 

Growth tomorrow? Good, but maybe overheated expectations
I don't see much short-term risk to Biogen's growth potential. Assuming no surprises with the FDA, Plegridy (a PEGylated version of Avonex) could launch around the middle of the year. Tecfidera should also continue to grow. Prescription data suggest that this new MS drug has already garnered around 15% share in the U.S. MS market, and the EU recently gave its approval for the drug.

Biogen is also gearing up to launch new long-acting treatments for the hemophilia A and B markets. Elocate, Biogen's product for the hemophilia A market, is widely expected by Wall Street analysts to grab significant share from incumbent Baxter's (NYSE:BAX) Advate. While I do not doubt the convenience of the longer-acting Elocate, it is worth remembering that Baxter has claimed that about half of its Advate patients are on once-every-three-days dosing, and therefore not likely to see all that much benefit from Elocate.

It's also important to note that doctors and patients in hemophilia tend to be resistant to change when something is working, and Baxter has its own long-acting treatment (BAX 855) in development. I believe that calls for 50% share shift to Biogen (suggesting over $1 billion in revenue) are aggressive; I expect Elocate to be a success, but I think it's going to underperform these gaudy expectations and take longer than expected to build into a strong contributor.

Growth down the line? Who knows...
I believe that Tecfidera will grow into an exceptionally successful drug for Biogen Idec. A 50% reduction in relapse rates is powerful, and I do not believe that drugs like Novartis' Gilenya will stand up.

Likewise, Sanofi (NYSE:SNY) is going to have an uphill climb in competing with Biogen. Aubagio has been shown to reduce relapses by about 30% -- a level of efficacy that would have been impressive a few years ago, but is not good enough to really distinguish itself today. Sanofi's other MS drug, Lemtrada, has shown much more impressive efficacy (50%-plus relapse reductions), but the significant safety concerns about the drug led the FDA to reject Sanofi's application in late December. Sanofi is attempting to appeal the FDA's decision, but that avenue seldom works out, and it is unclear at this point if Sanofi will be able to design a study that would convince the FDA to approve the drug.

The long and short of it is that I believe Biogen Idec has a very good chance of establishing a fortress in multiple sclerosis and growing its market share from around one-third in 2012 to over half of the market over the next five years. Remember, too, that Biogen also has a stake in late-stage MS drugs under development at AbbVie and Roche.

Beyond that, though, I see a high-risk/high-reward pipeline that may work out spectacularly or flame out. Partnered oncology programs with Roche are lower-risk (relatively speaking), but also less lucrative for Biogen if they work.

The company's partnership with Isis for SMNRx, an antisense treatment for spinal muscular atrophy, is fascinating from a scientific standpoint, but very early stage and it is unclear if the treatment will show a lasting benefit. Data readouts early in 2014 could be a significant needle-mover for Isis and perhaps for Biogen shares as well.

Biogen also has a Phase 2 candidate for idiopathic pulmonary fibrosis (STX-100) due to report data later in the year, and an IgG1 antibody for Alzheimer's (BIIB 037) in Phase Ib testing that offers a new approach to this notoriously difficult disease. Biogen also has compounds in development for lupus nephritis and sciataca.

SMNRx could be a significant orphan drug and an effective Alzheimer's therapy is a blockbuster in the making, but I think BIIB 033 may be the highest-potential drug today. This compound is an antibody to lingo-1 and may allow for remyelination. Existing MS drugs reduce the frequency and severity of relapses, but they do not promote remyelination. A phase 2 study in optic neuritis is more of a "proof of biology" study at this point, but if BIIB 033 shows efficacy in remyelination for MS patients and has a tolerability profile that promotes combo therapy, this could be a multibillion dollar addition to Biogen's already-strong MS franchise.

The bottom line
If all of those high-risk pipeline drugs work out, Biogen Idec shares would be quite cheap today. The history of drug development suggests that is unlikely, though, and these shares are quite pricy on a risk-adjusted basis. While I wouldn't be quick to dismount from a winning horse, protecting gains in Biogen Idec with stops or options may not be a bad idea at this point.

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