The Next Blue-Chip Stocks: Biogen Idec

Becoming the next blue chip stock isn't easy, especially in a high risk, high reward sector like biotech. But once you get to be as big as Biogen Idec (BIIB 4.56%), blue chip status is the next obvious step.

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Solid revenue growth
Consistent revenue growth is a stalwart of blue chip stocks, and Biogen Idec certainly fits the bill, with 40% revenue growth year over year in the second quarter. Much of the growth has been led by its franchise of multiple sclerosis drugs.

Source: Company press release.

The lack of growth for Avonex would be a concern if not for the solid launch of Tecfidera, an oral medication to treat multiple sclerosis. Avonex has to be injected, so it's quite remarkable that Tecfidera is on track to generate well over $2 billion in sales this year and isn't cannibalizing sales of Avonex.

The next franchise to watch is Biogen Idec's hemophilia program. Eloctate was recently approved by the FDA for hemophilia A, and Alprolix for hemophilia B is off to a decent start, generating $10 million in its first quarter on the market.

Biogen Idec has another multiple sclerosis drug In development called daclizumab, which only has to be injected once a month, and is looking into expanding the use of blood cancer drug Gazyva, which Biogen Idec developed with Roche. Both drugs could be blockbusters if the phase 3 data is good enough.

Dividend?
While it's not required, a dividend is certainly one of the tell-tale signs of a blue chip stock. Essentially, the company is throwing off more cash than it has any use for, so it shares the profits with investors through a dividend.

Biogen Idec isn't there yet.

It's not that Biogen Idec doesn't have the cash to pay a dividend. Over the last four quarters it's created $2.4 billion in free cash flow. But at this point Biogen Idec is much better off using its free cash to develop new medications.

Some large biotechs have taken an alternative course, using their cash to buy back shares. The strategy is a little more flexible, as investors are more forgiving of lumpy share buybacks than they are of lumpy dividends. Once a company starts a dividend, investors don't want it to stop.

While Biogen Idec has repurchased shares in the past, the repurchases have slowed recently and are there mostly to offset stock options given to employees. Biogen Idec calls it a "share stabilization plan."

The next blue chip?
Biogen Idec can get to blue chip status, but it could take another decade. While multiple sclerosis drug sales are solid, to be a blue chip Biogen Idec needs to be more diversified. It's on its way, but certainly not there yet. In the second quarter, Avonex, Tysabri, and Tecfidera combined made up 83% of Biogen Idec's revenue.

Once it's diversified, investors should expect Biogen Idec's growth to slow down substantially. At that point, it can start offering a dividend, much like Amgen (AMGN -0.19%) did a few years ago.