Better Times at Biogen IDEC

Earlier this week, my Rule Breakers colleague Charly Travers looked at the aftermath of the debacle surrounding the multiple sclerosis drug Tysabri, and concluded that BiogenIDEC (Nasdaq: BIIB  ) is, with some caveats, attractively priced right now. He made his assessment on the basis of a conservative judgment -- that Tysabri won't get back on the market and will become just an expensive memory.

Tysabri, to briefly review recent history, was voluntarily withdrawn from the market in late February after two cases of a very rare neurological infection called progressive multifocal leukoencephalopathy (PML) showed up among a cohort of about 3,000 clinical trial enrollees.

Biogen IDEC and its partner ElanPharmaceuticals (NYSE: ELN  ) got rocked so hard by the news that I thought it was worth looking at them again with a different set of assumptions -- most importantly, the assumption that Tysabri will once again be made available to patients. Let me acknowledge up front that this will bring me down a path of branching possibilities and pure speculation, but if you can bear a lack of hard numbers, stick with me.

First of all, let's look at the possible reasons why two incidences of this rare disease were found in a relatively small group of patients:

  1. It was pure coincidence -- a statistical anomaly. This isn't very likely, since the disease is found almost exclusively among severely immunosuppressed patients, most often people with full-blown AIDS. Nevertheless, this remains a remote possibility. A related and somewhat less unlikely scenario is that the patients in the trial actually had PML all along -- they were mistakenly diagnosed with multiple sclerosis (which has similar symptoms but is not so exceedingly rare) and enrolled in the study. The fact that their disease was really PML was only realized after the disease progressed.
  2. It was due to the combination of Tysabri and Avonex. This is a distinct possibility, since both cases of PNL involved patients on both drugs and there are no observed cases among patients on either Avonex or Tysabri alone.
  3. It was due to other drugs or drug combinations. This is also possible, since the patients involved were very sick and reportedly on a number of medications, including immune-suppressing steroids.
  4. It was due to Tysabri, but there are distinct patient characteristics or biomarkers that will define an at-risk population and allow others to continue taking the medication with relative safety. This includes the possibility that Tysabri, even if not safe for MS patients, will be safe for patients with Crohn's disease or rheumatoid arthritis, other indications under development.
  5. It was due to Tysabri, but the addition of another medication -- an immune stimulant or antiviral therapy -- will make the treatment acceptably safe and still appealing to some patients. (PML is the result of a virus -- in fact, a relative of human papilloma virus, the cause of genital warts -- that most of us carry in our brains already. It usually multiplies to full infection only in immune-compromised patients, where it demyelinates neurons in much the same way MS does, albeit by a different mechanism.)
  6. It was due to Tysabri, and the drug is not safe for any patient.

In five of these six scenarios, Tysabri should eventually be re-launched, but that doesn't mean each scenario is equally likely. Acknowledging that parsing out these possibilities calls for some pure guesswork, my starting point is to dismiss scenario 1 as too unlikely, and to hold scenarios 2 and 6 about equally likely, with a slight edge to scenario 2 (that is, the combination is the culprit). Scenarios 3, 4, and 5, then, tip the balance in favor of a re-launch -- say, about a 70% chance.

That kind of hand-waving analysis, in the absence of any real data, may not be the comfortable basis for a major investment decision, but if Biogen IDEC is a decent investment without Tysabri, then a better-than-equal chance of Tysabri being re-launched might make this a compelling buy.

Biogen after the divorce
Unfortunately, I'm not convinced Biogen IDEC is worth investing in without Tysabri. Avonex has brought the company blockbuster revenues and is still growing, but the competing Serono (NYSE: SRA  ) drug Rebif is growing faster -- U.S. sales of Rebif climbed 57% to $295.6 million in 2004 versus a mere 15% increase to $922 million for Avonex. This is not a complete surprise, since Avonex has been on the U.S. market much longer. But Rebif has done an impressive job capturing nearly 25% of U.S. market share after just two years on the market -- and with Pfizer (NYSE: PFE  ) as its marketing partner for only about 18 months. Worldwide, Avonex still has the edge, but Rebif is also a blockbuster, with over $1 billion in sales, and it is growing faster by this measure as well. Worldwide Rebif sales were up over 25% in 2004 once you factor out the effect of the amazing shrinking dollar, versus an increase of 21% for Avonex.

This doesn't argue that Avonex will cease to bring in major revenues or even cease growing for the next several years, but it does look like it is on the way to worldwide parity with Rebif. Avonex, because of its head start, will probably remain the No. 1 MS drug in the U.S. for the foreseeable future, but I would nonetheless expect to see its rate of growth slow in the next few years. For a biotech company with a weak pipeline and priced with expectations of healthy growth, I fear Avonex just won't be able to do the heavy lifting going forward. Even after the crash, Biogen IDEC's price/earnings/growth (PEG) ratio of about 1.2 is lower than that of most profitable biotechs, but not lower than, say, Amgen (Nasdaq: AMGN  ) , which is a much bigger boat to maneuver than Biogen IDEC, but also has somewhat less of a pipeline gap and some fresher products in Aranesp, Neulasta, Enbrel, Kepivance, and Sensipar. In fact, Biogen IDEC's PEG ratio isn't much lower than that of Serono, which right now can only be seen as the beneficiary of the Tysabri debacle.

Biogen IDEC's other main product, Rituxan, has been on the market for almost eight years as a treatment for non-Hodgkin's lymphoma (NHL). It still has some legs left, but is another product on which Biogen IDEC shares revenues -- in this case, with Genentech (NYSE: DNA  ) . The $615 million in revenues Rituxan brought Biogen IDEC in 2004 isn't going to grow enough to satisfy the expectations of investors in a biotech company with a market cap still at nearly $13 billion. In fact, sales growth of Rituxan is already decelerating -- overall revenues climbed 15% in 2004 versus 28% in 2003 -- and future growth relies on new indications for the drug far more than the core NHL market.

And beyond that, as Charly noted earlier this week, Biogen IDEC doesn't have a heck of a lot to offer. Zevalin sales are miniscule and Amevive has been largely disappointing.

The cannibal concern
So on the one hand, I think Tysabri probably will make it back to the markets, but on the other I don't much like Biogen IDEC in its current state. So how to make a buying decision? The re-introduction of Tysabri, under most conditions, would make BIIB stock jump significantly in the short term, and probably cause a lasting rise in value. Investors who want to bet on that are, in my opinion, more likely to win than lose on the facts, but even if you believe Tysabri is destined to return, there is no way of telling when it will happen. You could be a long time waiting for that pop, if it ever shows up.

And here's another factor to consider: renewed Tysabri sales could conceivably lower Biogen's total revenue. Remember that Biogen IDEC keeps 100% of Avonex revenues, but only 50% of the sales from Tysabri. Thus, a patient who switches from Avonex to Tysabri actually represents a loss of revenue. Tysabri costs about $23,000 per year, of which the company captures about $11,500 -- not enough to make up for the loss of the roughly $16,000 a year's worth of Avonex brings in.

When data and labeling indicated Tysabri and Avonex could work synergistically, this wasn't too much of an issue (although it was still a factor -- combination therapy is extremely expensive, and a patient forced to choose one drug might well have chosen Tysabri, which in terms of efficacy was the best MS drug in the world).

But if combination therapy is pegged as the culprit and Tysabri is given a clean bill of health as a single-agent therapy, patients could switch away from Avonex at an overall cost to Biogen IDEC.

Given that the reintroduction could, in the long run, be a mixed blessing for Biogen, I would come down on the side of avoiding BIIB right now. Yes, I think there is a better-than-even chance of profiting on a sudden pop, but with the all the uncertainty about the possibility or the timing of a Tysabri re-launch, there are better opportunities elsewhere.

Interested in hearing about some of those other opportunities? Take a free 30-day trial of the Motley Fool Rule Breakers, where we talk all things biotech both in our monthly newsletter and on our community discussion boards. Join Charly and me there.

Karl Thiel does more hand-waving about biotech and other companies inRule Breakers. He does not own shares of any company mentioned in the article. The Motley Fool has a disclosure policy.


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