Expecting Strong Upside from Biogen on Merrill Call

Merrill Lynch upgrades Biogen-Idec (BIIB) to Buy from Underperform based on their assessment of the company’s earnings growth potential, an improved outlook in the multiple sclerosis [MS] market, and a diversified mid to late-stage pipeline. Applying an average biotech P/E of 19x 2009E EPS (implied PEG of 1.0), they believe BIIB is significantly undervalued given expected growth, driven by acceleration of Tysabri usage in MS and the recent launch in Crohn’s.

Key near-term drivers include better-than-expected Q2 earnings and a Tysabri/PML update, which they believe is likely to be favorable. Additionally, with a 9% price increase for Avonex and 3% for Tysabri at the end of Q2, the firm expects the company to raise guidance for FY 2008. Merrill believes the Street has largely ignored BIIB’s fundamentals given the PML overhang and activist movements. These fundamentals continue to improve, making BIIB an attractive large-cap pick in H2 2008.

NDC sales data suggests that Tysabri sales are tracking above estimates, likely reflecting the recent Crohn’s disease launch (March) and increased clinician comfort with Tysabri usage in MS. Merrill expects Avonex sales at least in-line with expectations. Given the recent price increases for Avonex (9%) and Tysabri (3%), they anticipate continued revenue strength and upward guidance revision.

Biogen will provide a 2-year update for Tysabri either prior to the earnings call or on the call. Given the lack of negative press, the firm believes this update will be favorable, with a significant number of patients from the clinical trials exceeding 2- years of exposure. This is an important milestone, and a favorable report is likely to increase physician comfort with Tysabri usage.

Price target is upped to $79 from $64.

Notablecalls: In light on Genentech's (DNA) buyout offer from Roche, I think this BIIB upgrade will have legs. I expect to see at least a 5% upside move in BIIB today.