Biogen Idec Product Pipeline Will Propel It Higher

Aug. 2.13 | About: Biogen Inc. (BIIB)

Biogen Idec (NASDAQ:BIIB) was not beloved by Wall Street in 2008. There was concern about adverse reactions, including deaths from PML, from its key new drug, Tysabri for Multiple Sclerosis (MS). At the end of 2008 you could buy BIIB for $47.63 per share.

More recently, with Tysabri sales up due to a program to screen for PML, the approval of Tecfidera, the likely approval of Plegridy (both also for MS) and Eloctate for hemophilia A and Aprolix for hemophilia B in the near future, Biogen has been on a roll. BIIB hit a 52-week high of $242.64 on May 28. The 52 week low was $134 back on November 9, 2012.

All this left Biogen with a P/E ratio near 33 at the end of July close at $218.03. I think the pullback from the 52 week high is overdone.

What Biogen is worth today (if you don't believe the stock market auction price is always right, which I don't) depends on how its future profits are modeled. No one knows exactly how much new revenue Plegridy, Tecfidera, and Eloctate will generate in 2014 or later. With a very high percentage of revenue coming from MS therapies, a lot depends on how doctors and patients perceive Biogen's offering compared to those of other companies. In addition Avonex for MS is Biogen's largest revenue generator to date; it is possible that some of the new therapy revenue could come at the expense of Avonex, or even Tysabri.

We also generally don't know the pricing for new therapies until after they get FDA approval. We can use estimates, based on the prices of comparable therapies, but we need to acknowledge the uncertainty.

Tecfidera is certainly off to a good start, with revenue of $192 million in the June quarter, the first quarter it was available. However, about $82 million of this was inventory build, so it isn't necessarily the case that revenue will be higher in the September quarter.

In any case Biogen revenue has been growing rapidly. Q2 revenues were $1.723 billion, up 22% sequentially from $1.415 billion and up 21% from $1.421 billion in the year-earlier quarter. GAAP net income was $490.7 million, up 15% sequentially from $426.7 million and up 27% from $387.1 million year-earlier. GAAP EPS (earnings per share) were $2.06, up 15% sequentially from $1.79, and up 28% from $1.61 year-earlier.

Management calls this "a new era of growth for the benefit of patients, clinicians and shareholders." On the Q2 analyst call [see ] they increased full-year 2013 guidance to GAAP EPS between $7.28 and $7.53, and non-GAAP EPS between $8.25 and $8.50.

Given that Biogen is in growth mode and should be maintaining a non-GAAP P/E of 30 or more, that would work out to $247.50 to $255 per share.

Thinking in terms of 2015 and later, by then we should also see [assuming FDA approval] revenue from Daclizumab for MS. Daclizumab is already approved to prevent the rejection of transplanted organs. Good data from a Phase 2 trial was announced in 2011, and data from the Phase 3 trial should be available in 2014.

Beyond 2014, you can get a glimpse of potential value from the Biogen Idec product pipeline.

Biogen Idec announced it had purchased the full rights to Tysabri from Elan in April 2013, ending the collaboration. $3.25 billion of cash was used to make the purchase, leaving a cash balance of just $350 million. During Q2 the cash balance grew to $775 million.

Given how successful Biogen has been at creating a pipeline and bringing drugs to market, I think long-term investors like myself should be willing to pay a higher price for Biogen. Any short-term downward movements should be treated as buying opportunities. There are the usual risks from competition and previously unknown adverse events, as well as ever-present uncertainties with FDA approvals. More than compensating is the reality of international expansion of individual therapies. It takes years to get approval for a therapy in most of the world's markets. Given a popular therapy, this means international revenue ramps take several years after FDA approval.

In summary, if your investment horizon is 1 year or more, you are unlikely to go wrong buying Biogen at $225 a share or under. With shorter horizons you can hope for a pop back up to the 52 week high of $242.64. As new drugs are approved and come to market, we should get well above these figures.

Disclosure: I am long BIIB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.