Anyone that follows the biotech sector is certainly aware of last week's shocking news that the multiple sclerosis drug Tysabri was pulled off the market by Biogen IDEC (Nasdaq: BIIB ) and Elan (NYSE: ELN ) . Tysabri was widely thought to be an improvement over existing therapies, and many analysts, me included, had the drug pegged as a major blockbuster. The loss of such a potentially significant revenue driver sent Biogen IDEC's shares spiraling 44% and absolutely crushed Elan for a 79% loss.
When disruptive events like drug withdrawals trigger these major stock declines, there is always the possibility that the market has overreacted to the facts. Often there is an "act first and ask questions later" mentality in effect. So while we are still in the midst of this carnage, I want to explore the obvious and timely question of whether the deflated stock prices offer a great buying opportunity.
While that question certainly applies to both Biogen IDEC and Elan, I am going to look primarily at Biogen IDEC and set Elan to the side for the time being, for a number of reasons. Biogen IDEC already has more than $2 billion in annual revenue and therefore is far less dependent on Tysabri than Elan. There are also the matters of Elan having an extremely leveraged balance sheet and running massive losses. If it turns out that Tysabri does not ever get back on the market, which it may not, Elan is going to have a tougher time than Biogen IDEC.
The current situation
Before Tysabri was pulled off the market, Biogen IDEC had a market cap of $22.5 billion. The market cap now is a much slimmer $12.6 billion. To evaluate the company, there are two broad possibilities to consider. The first is that Tysabri never goes back on the market, and the second is that Tysabri sales resume at some point in the future.
Be aware that the second scenario is itself a combination of possibilities that are based upon any FDA restrictions that may or may not be placed on the drug's use. There are also going to be lingering concerns about the drug's safety. Taken together, these factors make it difficult to accurately predict how well Tysabri could sell if it does in fact return to the market.
Instead of trying to guess at what will happen with Tysabri and place odds on the different scenarios, I am going to take a conservative approach and assume that it will not get back on the market. The reason for doing this is simple: If Biogen IDEC is a good buy under this pessimistic scenario, then there will be additional upside if Tysabri does in fact re-emerge.
The drug portfolio
Biogen IDEC has two big moneymakers. The first is Avonex, the $1.4 billion multiple sclerosis drug that shot Biogen to prominence in the mid-1990s. After nearly a decade on the market, Avonex continues to be a valuable drug; 2004 sales displayed a healthy 21% annual growth. The company's other important drug is Rituxan, developed by IDEC Pharmaceuticals and marketed by Genentech (NYSE: DNA ) in the U.S. Biogen IDEC is entitled to share revenue from Rituxan's sales, and the company's cut totaled $615 million last year, up 25% from 2003.
Avonex and Rituxan are mature and established products, so growth in excess of 20% is not going to continue indefinitely. However, the drugs will serve as a foundation that the company can build upon for a long time.
In addition to Avonex and Rituxan, Biogen IDEC also markets Zevalin and AMEVIVE. Though these are newer products, sales growth has been anemic, which makes it unlikely that they will become major contributors.
While Biogen IDEC has four marketed products, the pipeline of clinical programs is quite thin. Despite the presence of numerous early-stage drug programs, there is a glaring lack of late-stage drugs. That is a black mark and a real concern for the company's growth over the next five years. Losing Tysabri leaves a big hole for the company in this regard -- without it there are no new products on the horizon with significant sales potential.
If the expenses related to the merger of Biogen and IDEC Pharmaceuticals are backed out of '04 earnings, the company's diluted earnings per share (EPS) was $1.44 last year. At the current stock price, that gives a price-to-earnings (P/E) ratio of 26 and a PEG of 1.3. Whether or not an investor thinks that is attractive depends on their perspective. A hard-core value investor is not going to be interested. On the other hand, the dedicated biotech investors used to seeing the majority of profitable biotechs with P/E ratios over 40 and PEGs of 2 will likely take a very close look.
The earnings picture for 2005 and beyond is murky. Without Tysabri, the company's forecast of 20% annual EPS growth through 2007 is not likely to materialize. That being said, I don't expect stagnation, either. Rituxan continues to be a dominant product and has several market expansion possibilities, which makes low-double-digit EPS growth likely.
Even without Tysabri, Biogen IDEC should be just fine. Its two major revenue sources are still showing solid growth and on a relative basis the multiples are a lot lower than what top-tier biotechs normally command. Also, drugs like Avonex and Rituxan have long histories and are very well known. It will be very difficult for competing drugs to unseat them, which gives them a significant competitive advantage. That is enough of a moat for me to find Biogen IDEC shares to be attractive right now despite some concerns over the company's thin pipeline.
An equally plausible scenario is that Tysabri does get back on the market. I think this is a reasonable expectation, as the drug had phenomenal results in its clinical trials. It may be restricted in use -- so, for example, it might not be allowed in combination with Avonex -- but the exact conditions remain to be determined over the next few months. Since I think Biogen IDEC is a reasonably good buy without Tysabri, any additional revenue that it generates if it does come back is icing on the cake.
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