Biogen Idec's (Nasdaq: BIIB ) fourth quarter results must have made Carl Icahn smile. But the guidance for next year gives me pause.
Let's recap: Revenue was up just 5%, while adjusted EPS were up a 29% thanks to cost cutting measures. Next year's guidance was more of the same: Revenue growth is expected to be in the "mid single digits," but growth in adjusted EPS is expected to top 10%.
While keeping cost of goods and SG&A expenses in check is undoubtedly a good thing, there's one number in the company's guidance that should have long-term investors a little worried.
| Metric |
2005
|
2006
|
2007
|
2008
|
2009
|
2010 Estimate
|
|
Percent of Revenue Spent on R&D
|
30.9%
|
26.8%
|
29.2%
|
26.2%
|
29.3%
|
24%-27%
|
Source: Capital IQ, a division of Standard & Poor's and company press release.
The low end of Biogen's guidance is well below the company's average over the last several years. Some of the decreased spending probably has to do with a few drugs that haven't worked out. Biogen killed two blood-cancer drugs last October, and announced yesterday that it wouldn't develop heart-failure drug Adentri. The latter isn't a big shock, given Merck's (NYSE: MRK ) failure of a similar drug.
Saving money now will line investors' pockets, but at what cost to future earnings? This is a drug company, folks, one that needs healthy R&D spending in order to grow in the future.
In addition, earnings growth from existing drugs might not come so easily pretty soon. Novartis (NYSE: NVS ) and Merck KGaA are both developing oral drugs to treat multiple sclerosis. Assuming those get approved, they probably won't affect sales of Biogen's and Elan's (NYSE: ELN ) Tysabri too much, because it's often used after other drugs fail.
But those oral drugs could cut into sales of MS drugs that have to be injected, like Biogen's own Avonex, which made up more than 70% of the company's product revenue last year. Competing drugs like Teva Pharmaceutical's (Nasdaq: TEVA ) Copaxone and Rebif from Pfizer (NYSE: PFE ) and EMD Serono would also be affected, but that's not my worry.
Biogen's best strategy at this point is to use some of its $1.3 billion in cash and equivalents to license late-stage drug candidates, like it did with Acorda Therapeutics' (Nasdaq: ACOR ) Ampyra. Boosting the pipeline -- and the R&D spending in the process -- is the only way Biogen can get back to the double-digit revenue growth that investors have grown accustomed to ... and which the company needs in order to sustain those double-digit earnings growth targets.
Chuck Saletta wants to know whether this guy is the next Buffett. Hint: He doesn't mean Icahn.
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