News World: Biogen: Riding High in the Biotech Saddle

Biogen: Riding High in the Biotech Saddle

By Brian Graney (TMF Panic)
September 16, 1999

Shares of biotechnology company Biogen (Nasdaq: BGEN) headed north this morning after the company said results for its current third quarter will come in ahead of analysts' estimates. The Cambridge, Massachusetts-based firm is projecting EPS of $0.38, which is $0.02 ahead of the prior First Call mean estimate. The upside surprise is being attributed to strong patient growth for the company's Avonex drug for relapsing forms of multiple sclerosis (MS). Sales of Avonex -- currently the only product cash cow in Biogen's barnyard -- are expected to hit $160 million in the period, up 10% sequentially and up 49% year-over-year.

Researchers have found that the sooner patients can be treated with Avonex after the initial diagnosis of MS, the better. As the word gets out about the drug and the advantages of early treatment spreads, an increasing number of MS patients are opting for once-a-week Avonex injections. In the U.S., the number of patients on Avonex is expected to rise by about 5,000 during the quarter, bringing Biogen's worldwide patient base to 75,000. This expansion of the patient rolls is what is keeping the Biogen growth story moving forward. Currently, Avonex is well-positioned for even more growth. According to the National Multiple Sclerosis Society, roughly 330,000 Americans are living with MS and an additional 200 people are diagnosed with the disease every week.

MS attacks the body in various ways. While not fatal, cases can run the line from mild to severe, depending on the individual. Avonex treats the most common form called relapsing MS, in which the patient suffers symptoms of the disease for only a short period of time before everything goes back to normal. Over time, however, the same symptom or a different symptom reappears, and a pattern of relapses and remissions develops.

Biogen is working on getting Avonex approved to treat a rarer, more chronic form of MS called secondary progression. After a period of relapses and remissions, secondary progressive MS patients break the cycle and start to see their symptoms develop in a more slow and gradual manner. Tapping into this market opportunity is where Biogen is headed next, providing further assurance that Avonex will continue to produce cash flow up until its patent runs out in 2003.

With the near-term outlook for Avonex bright, is Biogen reasonably priced at 62 times the soon-to-be-adjusted First Call 1999 earnings estimate of $1.37 per share? If the company can keep up the 50%+ earnings growth rates that it has maintained over the past two years, the answer to that question may be "yes." But surely, those heady growth rates are not sustainable and will need to come down at some point.

Won't they?

Ultimately, the long-term fate of Biogen and other biotechs boils down to the drug pipeline and the success rate of individual research and development programs. If Biogen can follow-up Avonex with a drug equally successful, the cash flow snowball will continue on down the mountain. The company is determined to make that happen, plowing back the gains from its top-line growth into additional R&D. Biogen projects that its R&D budget will expand to $300 million in 2000, up 69% from last year's total.

For an investor thinking about Biogen as anything but a short-term story, due diligence should start with a thorough understanding of the pipeline drugs that the company is working on and the markets that they will potentially target. Projecting future earnings beyond the limit of Avonex's patent protection period is a difficult endeavor, since the assets backing up those earnings will ultimately rely on an intangible -- the intellectual ability of the company's researchers to find another blockbuster.

Properly valuing that intellectual capital has been an enormous challenge for the market, as Biogen's more than 400% share price appreciation over the past two years has illustrated. It is also a major challenge for any investor taking the long-term view on a single biotech company. As in medical science, thorough and complete research is of primary importance in this area.

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