Biogen Slips After Drug Trial Halted (News) October 22, 1999

Biogen Slips After Drug Trial Halted

By Bill Barker (TMF Max)
October 22, 1999

Shares of Cambridge, Massachusetts-based Biogen (Nasdaq: BGEN) slipped $8 3/16 to $64 3/8 today, following the company's announcement after the close of the market yesterday that it was halting several Phase II trials of an antibody-based drug, Antova, that was being tested for treating hemophilia, multiple sclerosis, and diabetes. Biogen said that it was "working closely with the FDA on reviewing data and determining when trials could be resumed."

Biogen currently derives the lion's share of its revenues from the sales of one drug, Avonex, a once-a-week treatment that slows the progression of multiple sclerosis. Sales for Avonex have risen to a level of approximately $700 million annually, and are expected to reach the $1 billion level within two to three years. As with any biotech stock, however, the price placed on the company's shares heavily reflects not only the success of approved drugs but what is in the research and development pipeline. Antova was the second-closest drug (after Amevive, a psoriasis treatment) to completing the Food and Drug Administration (FDA) testing process. With the possibility now raised that Antova may not make it to market, the stock today is reflecting a renewed understanding that, at the moment, Biogen has only one major drug upon which it can rely, and that patent protection on that drug does not last forever.

In reaction to the news of the canceled trials, many of Wall Street's analysts either downgraded the stock, dropped their "price targets" or both. One holdout on the downgrading was Prudential Securities, which quickly reiterated its "Strong Buy" and price target on the stock. Prudential's refusal to downgrade may in some small part be related to the fact that, in a bit of bad timing, only three days earlier Prudential had upgraded the stock from "Accumulate" to "Strong Buy" for valuation reasons.

Prudential maintains its price target of $96 for the stock, though reading both the October 19 report and this morning's report, it is completely impossible to tell what, if anything, the price target might be based upon. Since yesterday's announcement regarding Antova clearly does influence, negatively, the probability that Antova will contribute to future cash flows, apparently Prudential's price target was based on something other than the intrinsic value of the company as estimated by discounting estimated future cash flows.

The take that yesterday's announcement should not affect the valuation of the company is defensible if one is working from the premise that a certain amount of both positive and negative announcements regarding the development of drugs prior to approval by the FDA is inevitable. One can make assumptions about the approximate number of drugs that will successfully wind their way through the regulatory process, and no one announcement should therefore affect the value of the whole company too heavily if an investor, and the market, has already accurately discounted the probability of any one drug turning into a blockbuster.

That approach is best used where there are a sufficient number of drugs that have been successfully developed already by a company to demonstrate that future drug approvals have at least some level of probability. Biogen, however, is essentially a one-trick pony at the time being. Behind the strong flaghsip product Avonex there are numerous drugs in the research pipeline, but there is little assurance in the historical record that any one drug will make it big, or ever make it at all.

Shares of Biogen are still up over 50% for the year despite the fact that future cash flows now appear somewhat more iffy than they might have appeared at the beginning of the year. Potential investors who are thinking about whether Biogen is currently at an attractive price may wish to keep that in mind when attempting to value the company today.

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