You have to spend money to make money.
The culprit: continued high spending on R&D. Biogen expects to spend 24% to 25% of revenue on R&D; last year it was 24.2%. While the level has come down in recent years, as it should with revenue zooming up, it's not quite at the 20% level Biogen is targeting.
Carl Icahn would be rolling over in his grave if it weren't for the fact that he reduced his holdings of Biogen by about 50% last year -- and that he's still alive. The activist investor still owns about $1 billion worth of stock. The short-term thinker can't be too excited about the spending, but he can't be too upset with management, either. Shares have more than doubled since his purchases in 2007 and 2008.
Of course, the reason shares are up and the reason R&D costs are up are completely correlated. Shares have zoomed up because to the potential of Biogen's oral multiple sclerosis drug BG-12 and other successes in the pipeline. BG-12 looks like it should be able to take market share from Teva Pharmaceuticals'
For sports teams, there are rebuilding years; for biotechs, there are investing years where they have to sacrifice short-term gains for long-term potential. Biogen could return more of its cash to investors, but considering how well it's done with its pipeline, investors are probably better off letting the company reinvest it.
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