Posted 3/19/99
Company Focus
Biogen converts healthy sales into surging stock
The biotech with multiple sclerosis therapies and a packed drug pipeline now offers investors a powerful side effect: Shares have swelled 206% since last year.
Investor
By George S. Mack
It's hard to hear the term genetic engineering without picturing all sorts of swamp creatures and killer tomatoes from Hollywood's B movies.
But one day in 1978, a group of not-so-mad visionaries got together in Geneva, Switzerland, to brainstorm a new kind of business that would tinker with DNA molecules -- the actual template of life. From that hopeful beginning, Nobel laureate biologists Phillip Sharp of the Massachusetts Institute of Technology and Walter Gilbert of Harvard University became the co-founders of Biogen (BGEN) and creators of a new industry with a single purpose: to create drug therapies for diseases then considered untreatable.
Suffering patients now are being treated by those new therapies. But Biogen investors also have been treated well in the 1990s, following a slow start as a public company in 1984. Since the beginning of this decade, the stock is up 1,216% -- almost double the advance of pharmaceutical powerhouses Warner-Lambert (WLA), Eli Lilly (LLY) and Merck (MRK). And during the last two years, it has even zipped past Pfizer (PFE), with a 206% gain since Jan. 1, 1998, alone.
Now some analysts believe Biogen might only be getting started. What's happening and what does the future hold? Let's take a look.
Treating multiple sclerosis
Biogen developed a variety of successful therapies and diagnostics that it licensed to bigger drug makers over its first few years, but it really hit the big time in 1996 when it launched Avonex, the world's leading treatment for multiple sclerosis. Used already by more than 55,000 patients in the United States, Europe and Canada, approvals are now on the horizon in Australia, central and eastern Europe, Turkey and South Africa.
Multiple sclerosis can be a fatal disease in which the body's immune system attacks the wrap-around myelin sheath that surrounds nerve fibers -- sort of like stripping the plastic insulation that covers electrical wire. One of the worst things about multiple sclerosis is that its victims live in constant fear that their bodies will short-circuit and drift into total helplessness. But Avonex, a form of interferon beta that regulates the body's immune response, is proven to slow the attack.
When the company brought Avonex to market in 1996, it became the first fully owned proprietary product of Biogen's portfolio. And the bottom line shows it: Biogen's 1997 revenues grew nearly 60% as earnings per share vaulted more than 110%. Last year's total revenues grew 35% to $557.6 million with EPS advancing a very respectable 55% to $1.80.
Catching up with the drug stocks
Two analysts, Richard van den Broek of Hambrecht & Quist and Albert Rauch of Everen Securities, say the difference in valuation between the stocks of major pharmaceuticals and biotech companies is quite large at the moment. The reason, they say, is because large drug stocks have done so well over the past year. To compare, Rauch uses the PEG ratio (P/E to growth rate), which for drug stocks is currently 2.4 and for "profitable biotechnology companies" is 1.6. Says Rauch, "I see the large-cap biotech stocks increasing their valuations just to catch up with the drug stocks."
Van den Broek expects this year's earnings per share at Biogen to grow 40% to $2.51 with earnings per share increasing another 17% to $2.93 in 2000. Just a bit more upbeat, Rauch expects EPS to hit $2.62 this year followed by $3.04 for 2000 with a long-term target price of $119.
To help meet those goals, the company got terrific news on March 1: The U.S. Food and Drug Administration rebuffed a competing drug, Rebif, from Serono Laboratories. Analysts now expect Biogen to maintain its U.S. Avonex exclusivity through May 2003 under the Orphan Drug Act, which gives incentives for drugs used in treating rare afflictions.
Rauch expects Avonex's 1999 sales to grow more than 42% to $562 million, which is greater than the entire company's revenues during 1998. Though Avonex is outselling its next direct competitor 2 to1 and is by itself 60% of the multiple sclerosis drug market, Rauch estimates that only a third of multiple sclerosis patients are now being treated. He believes Avonex will grow to have annual sales of $845 million by 2003.
When it was a young biotech firm, Biogen -- as small biotech companies do today -- licensed out its discoveries to the big drug companies. Rauch is counting on 1999 royalties of $174 million from partnership products including:
--Cancer-viral drug Intron A, an alpha interferon targeted at 16 different therapies, developed with partner Schering-Plough (SGP).
--Hepatitis B vaccines developed with SmithKline Beecham (SBH) and Merck.
--Hepatitis B diagnostics developed with Abbott Laboratories (ABT) and others.
Coleman Lannum, biotech and medical devices analyst at Putnam Investments, says he believes Biogen has some "potential blockbusters" in its pipeline worth "conservatively" hundreds of millions of dollars, but those products are at least a couple of years away from commercialization. Once a product passes through phase 1, 2 and 3 trials, it can then file an application with the FDA, which will approve or reject a drug for use by patients in the U.S.
This is what the pipeline looks like today:
Avonex, already on the market for relapsing forms of multiple sclerosis, is in phase 3 studies for other forms of the disease, as well as phase 2 trials for brain tumors and pulmonary fibrosis, which makes breathing difficult. On Feb. 18, Biogen announced that it would pay Inhale Therapeutic Systems (INHL) $25 million to begin development of an inhaled formulation for Avonex.
Antova, a monoclonal antibody, is in phase 2 clinical testing for idiopathic thrombocytopenic purpura, a platelet disorder characterized by spontaneous bleeding into the skin.
Antova is also in phase 2 clinical studies for systemic lupus erythematosus, an inflammatory connective tissue disease affecting everything from joints to kidneys. Rauch estimates Antova's potential to be around $1.5 billion.
Amevive, a protein that inhibits T-cell function, is in phase 2 trials for psoriasis. It is expected to come to market in the first half of 2002 with a market potential of $3.6 billion, according to Rauch.
Adentri is in phase 2 trials to relieve water retention of congestive heart failure.
Gelsolin is in phase 2 collaboration with Merck. Gelsolin intends to treat inherited disease cystic fibrosis, a lung disorder that is ultimately fatal.
Rauch says there's a lot of energy in large biotech stocks right now -- and that goes double for Biogen, due to its strong Avonex sales. Van den Broek calls Biogen a "growth story with great momentum." If they're right, this is one biotech that could challenge the industry's leaders.
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