Diversification is all well and good, but there's nothing wrong with a well-run company that does a few things very well. With an enviable franchise in multiple sclerosis, a promising pipeline and a host of pharmaceutical giants desperate for growth and operating leverage, Biogen Idec (Nasdaq:BIIB) could yet have a few surprises left for shareholders.
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Steady Progress in Q3
Third quarter results did not have a lot of financial surprises, but Biogen Idec continues to grow nicely. Total revenue rose 11%, with Tysabri, which the company sells in partnership with Elan (NYSE:ELN), growing 26% and key drug Avonex showing 6% sales growth. Although Avonex seems to be showing some wear with Novartis's (NYSE:NVS) drug Gilenya on the market, it still represents over half of the company's sales.
Though the company saw some erosion in gross margin of more than one full point, it still stands at nearly 91%. Likewise, while reported operating income growth of 152% overstates real performance, adjusted operating income growth of 23% is hardly a poor or embarrassing result.
Tysabri not Done Yet
Tysabri has been a controversial and troublesome drug for Biogen Idec and Elan, for a while now. It shows remarkable efficacy in many patients, including those who have not had good responses to other MS treatments, but it carries a small, but real, risk of a very dangerous condition called progressive multifocal leukoencephalopathy.
This is not news; it has been an issue for nearly a decade now. What is news is that the company reached an agreement with Quest Diagnostics (NYSE:DGX), a few months ago, for a diagnostic test than can detect the JC virus antibody. The presence of the JC virus seems to correlate with the risk of PML; the availability of a reliable and safe diagnostic, should give doctors more confidence in prescribing Tysabri to their patients. That, in turn, should open up a large population of under-treated patients who could benefit from the drug and boost sales for this partnership.
A Strong Pipeline
Much of the enthusiasm for Biogen, today, centers around the two positive Phase three studies on BG-12, it's new oral MS drug. Though it will have to compete with Gilyena, as well drugs from Teva (Nasdaq:TEVA) and Merck (Nasdaq:MKGAY.PK), the safety and efficacy profile of BG-12 suggest a real potential winner here. At a minimum, BG-12 should ease the burden of flagging momentum in Avonex, while some believe that it could become a $3 billion drug, in its own right.
However, this is not a one-drug pipeline, by any means. Another promising MS drug is deeper in the pipeline; Biogen Idec shareholders can also look forward to late-stage trial data on compounds to treat ALS and hemophilia, later in 2012, neither of which seems to factor much in analyst models, at this point.
Time for Others to Come Knocking?
Assuming that BG-12 makes it to market and the launch goes reasonably well, it is hard to believe that Biogen Idec will be a public company other than by management's own choice. A company like Pfizer (NYSE:PFE), Merck (NYSE:MRK), or Sanofi (NYSE:SNY) would love to have that growing, profitable and cash-rich MS franchise for its own, to say nothing of the "call options" in BIIB's pipeline.
Now some investors may say that Biogen Idec is too expensive to take out. To be sure, the stock is not cheap by many metrics, and even less so when factoring in a presumed acquisition multiple. Here's the thing, Big Pharma hates doubt and is quite happy to pay up for certainty. In other words, paying for the near-certainty of Biogen Idec's compelling MS franchise, is more appealing than taking a flyer on a beaten-down oncology or autoimmune biotech with uncertain sales prospects. After all, remember that discount rates are a key part of valuation analyses and a lower discount rate, which accompanies greater certainty about a drug/company's prospects, can lead to a much higher "fair" price.
The Bottom Line
Buying Biogen Idec in hopes of a buyout is a risky endeavor and the stock is not cheap. Again, though, investors have to consider the certainty equation; stocks like Alexion (Nasdaq:ALXN) and Celgene (Nasdaq:CELG) aren't cheap either, but you know what you're getting. Accordingly, Biogen is at least a good hold, and may still be a credible buy, for those with longer horizons and less appetite for risk, relatively speaking. (For additional reading, take a look at A Checklist For Successful Medical Technology Investment.)
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At the time of writing Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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