SSB's take:
Biogen, Inc. (BGEN)
BGEN: Earnings Upside Driven by Reduced 3H (Underperform, High Risk)
Expenses; Fundamentals Remain a Concern Mkt Cap: $5,044.5 mil.
April 2, 2003 SUMMARY
* This morning, Biogen preannounced first quarter earnings
BIOTECHNOLOGY and indicated it expects revenues to be $320MM, $10MM above
Elise Wang our estimate, generating operating earnings in the range of
$0.47-0.51, above our estimate of $0.38 and Street
consensus of $0.37. Previous company guidance of Q1
Soham Pandya earnings was $0.31-0.38. Cost reductions were also cited
as contributing to earnings.
* We believe a significant portion of the improved earnings
Caroline is being driven by cost containment efforts as opposed to
Goodman improving fundamentals for its core businesses. Despite
this upside surprise in financial performance, we remain
concerned with the fundamental outlook for Biogen. We
continue to expect intense competition in the multiple
sclerosis market for Avonex. In addition, the market
launch for Amevive remains relatively slow. We recently
revised our FY03 Amevive sales estimate to $60MM from
$90MM.
* We rate BGEN Underperform and Marketweight the biotech
sector.
FUNDAMENTALS
P/E (12/03E) 18.9x
P/E (12/04E) 18.4x
TEV/EBITDA (12/03E) NA
TEV/EBITDA (12/04E) NA
Book Value/Share (12/03E) NA
Price/Book Value NA
Dividend/Yield (12/03E) NA/NA
Revenue (12/03E) $1,320.8 mil.
Proj. Long-Term EPS Growth 10%
ROE (12/03E) NA
Long-Term Debt to Capital(a) NA
BGEN is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (4/2/03) $33.97 Current Rating 3H
52-Week Range $50.94-$28.89 Prior Rating 3H
Shares Outstanding(a) 148.5 mil. Current Target Price $40.00
Convertible No Previous Target Price $40.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/02A Actual $0.48A $0.31A $0.37A $0.43A $1.59A
12/03E Current $0.47E $0.47E $0.44E $0.44E $1.80E
Previous $0.38E $0.42E $0.43E $0.43E $1.66E
12/04E Current NA NA NA NA $1.85E
Previous NA NA NA NA $1.85E
12/05E Current NA NA NA NA $2.12E
Previous NA NA NA NA $2.12E
First Call Consensus EPS: 12/03E $1.66; 12/04E $1.88; 12/05E $2.15
OPINION
This morning, Biogen preannounced first quarter earnings and indicated it
expects revenues to be $320 million, $10 million above our estimate,
generating operating earnings in the range of $0.47-$0.51, also above our
estimate of $0.38 and Street consensus of $0.37. Previous company guidance
of Q1 earnings was a $0.31-$0.38. The company also indicated that reported
earnings would reflect a one-time unspecified charge of $0.08 per share.
Based on conversations with the company, Biogen indicated that the better-
than-expected revenues were driven by improved worldwide sales of Avonex and
strong royalty revenues. Specifically, the company indicated worldwide
Avonex sales will come in above $270 million, which is above our estimate of
$264 million and the Street range of $260-270 million and royalty revenues
will come in at the mid-$40 million level, above our estimate of $42 million
and at the high end of the Street range. In our opinion, we believe Avonex
sales is benefiting from an approximate 5% price increase implemented in late
2002 in the U.S. and a strong Euro in Europe.
The company also indicated that at least a third of the improvement in
earnings is being driven by lower-than-expected R&D and SG&A expenses. In
our opinion, the company has been implementing a cost containment effort
despite the recent launch of Amevive for psoriasis in the U.S. As a
reminder, Amevive did not receive European regulatory approval a month ago.
Consequently, Biogen has eliminated its sales and marketing infrastructure (a
couple of dozen personnel) in Germany for Amevive. Biogen also indicated it
has implemented operating efficiencies in their information technology area
and other operational areas, including SG&A and R&D. Based on our analysis,
we believe a significant portion of the improved earnings is being driven by
these cost containment efforts as opposed to improving fundamentals for its
core businesses. The company did raise its fiscal 2003 EPS guidance to
$1.72-$1.85 from $1.63-$1.78.
Revised Estimates: We have adjusted our Q1 2003 and fiscal 2003 estimates
based on this updated guidance. Specifically, we now estimate Q1 2003
worldwide Avonex sales of $271 million (U.S. sales of $188 million U.S.; Ex-
U.S. sales of $83 million). Our fiscal 2003 worldwide Avonex sales estimate
is increased to $1.1 billion, representing 6% year-over-year growth, from
$1.08 billion, representing 4% year-over-year growth. The company's prior
guidance was that U.S. Avonex sales would grow 0-2% while ex-U.S. Avonex
sales would increase 8-12% generating a low-single-digit growth level for
worldwide Avonex sales. We have also adjusted our Q1 2003 and fiscal 2003
royalty revenue estimates to $46 million (from $42 million) and $170 million
(from $153 million), respectively.
We have also reduced our estimates for operating expenses for Q1 2003.
Specifically, we have reduced our operating expenses for Q1 2003 to $230
million from $235 million. For Q1 2003, our R&D expense forecast is reduced
to $93.8 million from $96 million and our SG&A expense forecast is adjusted
to $92.9 million from $97 million. Our new EPS estimates for Q1 2003 and
fiscal 2003 are $0.47 (previously $0.38) and $1.80 (previously $1.66),
respectively. We note that our EPS estimates for subsequent quarters will be
sequentially down given company guidance. Specifically, our EPS estimates
are revised to $0.47 (from $0.42) for Q2, $0.44 (from $0.43) for Q3 and $0.44
(from $0.43) for Q4. Our fiscal 2004 EPS estimate remains unchanged at
$1.85.
Despite this upside surprise in financial performance, we remain concerned
with the fundamental outlook for Biogen. We continue to expect intense
competition in the multiple sclerosis market for Avonex. In addition, the
market launch for Amevive remains relatively slow in an increasingly
competitive market. As a reminder, based on the recent American Academy of
Dermatology (AAD) meeting held last week, Amgen's Enbrel appears to be
gaining recognition and use for psoriasis. Amevive is an important driver
for future growth for Biogen.
Additionally, according to the company, as of the end of March, over 600
physicians have initiated nearly 2,000 patients into the process of insurance
verification. Furthermore, among patients who have completed this process,
more than 90% have received coverage for Amevive. However, we note that
based on our discussions with physicians at the recent Dermatology meeting,
this reimbursement process can take not just several weeks, but in some cases
several months. We believe that the difficulties in paving the way for
reimbursement are currently a major obstacle hindering a more rapid uptake of
the product. As a reminder, on March 21st, we revised our Amevive sales
estimates to $3.0 million from $5.0 million for Q1 2003 and to $60 million
from $90 million for fiscal 2003. Given the relatively slow market launch,
we are also revising our Amevive sales estimates to $165 million from $180
million for fiscal 2004 and to $210 million from $225 million for fiscal
2005. Our EPS estimates remain $1.85 for fiscal 2004 and $2.12 for fiscal
2005.
UPCOMING MILESTONES
* FDA approval of prefilled liquid formulation for Avonex Q2/Q3 03
* Decision on Celltech collaboration on Humicade H1 2003
* Clinical results from Phase II study of LFA-1 antagonist in Mid-2003
psoriasis at IPS in July
* Initiation of Phase III study of LFA-1 antagonist in psoriasis H2 2003
* Potential interim results from Phase III Antegren/Avonex study in H1 2004
MS
COMPANY DESCRIPTION
Founded in 1979, Biogen was one of the earliest biotechnology companies to
develop recombinant proteins using genetic engineering technology. The
company's lead product, Avonex, for multiple sclerosis, generated $971
million in sales in fiscal year 2001 and has the dominant market share
position in the United States. Additionally, Biogen derives royalty revenue
from licensing agreements for interferon alpha and hepatitis B vaccines. The
company recently received FDA approval for Amevive (LFA3TIP), to treat
moderate-to-severe chronic plaque psoriasis, which we believe will be
critical for Biogen's future earnings growth. Additionally, the company has
a late-stage development candidate, Antegren, a monoclonal antibody being
developed with partner Elan for multiple sclerosis and Crohn's disease, which
is currently in Phase III clinical studies.
VALUATION
Our analysis indicates that the large-cap biotech group is currently trading
at an average P/E multiple in the mid-20s to fiscal 2004 EPS estimates. Our
12-month price target for Biogen is $40 reflecting a P/E multiple of 21x
applied to our fiscal 2004 EPS estimate of $1.85 to reflect the higher risk
associated with the company relative to other large cap biotech names, in our
view.
RISKS
Avonex currently account for the majority of revenues for the company. While
the drug is the current market leader in the U.S., the changing dynamics in
the U.S. multiple sclerosis market are making this market increasingly more
competitive. Any delay in clinical development or regulatory approval of
developing products could have a material impact on the company's earnings,
in our opinion. Amevive recently received FDA approval and in our view,
sales of this product for psoriasis will be critical for future earnings
growth for the company. |
