July 9, 1999
Is Biogen Too Good to Be True?
By Stacey L. Bradford
SmartMoney
THERE'S NO SIMPLE formula for making money in the biotech industry. For every winning stock, there are dozens more that fall off the radar and into obscurity. So it should come as no surprise that when a company starts to pay off, investors want to stick with it -- no matter what its valuation.
Such is the case with Cambridge, Mass.-based Biogen (BGEN). The firm's stock has soared over 50% since January thanks to the success of its multiple sclerosis drug Avonex. And as long as sales of the medication keep growing, most on Wall Street expect even higher returns over the next six to 12 months.
Late Thursday, the company went a long way toward solidifying investor confidence by announcing second-quarter earnings of 34 cents a share excluding charges, beating analysts' consensus estimate by two cents. Avonex's second-quarter sales increased by 68% to $145.9 million, compared with $87.1 million a year ago. And Biogen says roughly 700,000 MS patients use the drug worldwide -- a number the company expects to rise significantly if Biogen can prove that Avonex is effective for use earlier in the course of the disease. Results of the tests are due out by late 2000. Avonex has roughly 60% of the MS market and sales could reach $845 million by 2002, estimates Eric Schmidt of SG Cowen. What's more, Biogen has three drugs in its pipeline that are currently in clinical trials. No wonder the momentum investors have piled into the stock.
There's just one hitch. Not everyone on Wall Street is buying into this biotech fairy tale -- at least not today: Biogen shares lost 1 13/16 or 2.7% to close at 64 7/8. It seems that even a company with as strong a reputation as Biogen has its limits. And a small group of investors argue that there is no way to justify Biogen at a higher share price. At this point, they believe the stock is fully valued.
Here's why. Right now, Biogen is really a one-drug company with its shares being supported almost entirely by sales of Avonex. But what happens when this market starts to mature? Wall Street Journal ranked analyst Caroline Copithorne of Prudential Securities says this is precisely what will happen in the next few years. As it is, this medication has already been out on the market since May 1996.
As for the company's drugs in clinical trials, all three are at least three years away from market, says Richard van den Broek of Hambrecht & Quist. (Biogen argues that one of the drugs may reach the market about six month earlier.) But even this timetable assumes that all goes well with the trials and that the drugs are approved by without delay by the Food and Drug Administration.
Of the three drugs, Amervive, which is used to treat severe psoriasis, seems like the most promising. It recently completed Phase II clinical trials and the results so far look encouraging. Just one hitch. Biogen is planning on reformulating Amervive from an intravenous delivery (which was used during the clinical trials) to an intramuscular injection, and it must conduct additional studies to ensure that the new version is the bioequivalency of the original one. Prudential's Copithorne says the reformulation is an additional risk factor as the drug moves to a more advanced stage in clinical trials. The company estimates Amervive could be out on the market sometime between late 2001 and 2002.
Biogen's other two drugs, Andentri for congestive heart failure and Antova, the immunosuppressive disease treatment for lupus and organ transplants, are still in Phase II clinical trials. It's difficult to know these medications' likely success until these trials are completed. Analysts estimate these drugs still three years away from commercialization.
Copithorne also points out that these new drugs are not expected to have the same sales potential as Avonex. Consequently, just to maintain its current 37% growth rate, at least two, if not all of them, will have to successfully make it to market -- leaving little room for error. And should these drugs not win approval, a real possibility for any drug still in Phase II clinical trials, Copithorne says she is worried about how Biogen will react. "The company would be backed into a corner," she says. While it has other drugs in the pipeline, they are in much earlier stages of development.
Selling at 50 times earnings, Biogen's stock already reflects Avonex's potential sales, says Hambrecht & Quist's van den Broek. Investors who want to buy the stock should do so below $50 a share. "The recent failure of Genetech's NGF in Phase III trials after favorable Phase II data serves as a reminder that even for the top-tier biotech companies with strong track records, drug development is a difficult business," he says. The recommendation from the analyst is to be patient and wait for more clinical data. But don't tell those momentum investors. Whenever they get impatient, they sell first and ask questions later. |
